TC Shipping Ltd has decided to purchase a machine to augment the company's installed capacity to meet the growing demand for its products. There are three machines under consideration of the management. The relevant details including estimated yearly expenditure and sales are given below: All Sales are on cash. Corporate income tax rate is 40%. Interest on Capital may be assumed to be 10%.
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Particulars
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Machine 1
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Machine 2
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Machine 3
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Initial Investment Required
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3,00000
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3,00000
|
3,00000
|
|
Estimated Annual Sales
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5,00,000
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4,00,000
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4,50,000
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Cost of Production(Estimated):
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|
|
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Direct Materials
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40,000
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50,000
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48,000
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Direct Labor
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50,000
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30,000
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36,000
|
|
Factory overheads
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60,000
|
50,000
|
58,000
|
|
Administration costs
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20,000
|
50,000
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'15,000
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|
Selling and Distribution Costs
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10,000
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10,000
|
10,000
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The economics life of Machine 1 is 2 years, while it is 3 years for the other two. The scrap values are Rs.40, 000, Rs. 25,000, and Rs.30, 000 respectively. Suggest the most profitable investment based on various project appraisal techniques.