Question

 Different designs have been made for the equipment planned to be purchased and the following data has been obtained.
                                             Design I    Design II   Design III   Design IV
Total capital investment ,                   $ 22 000    24 000       24 500      28 000
Production expenses before tax,$ / Day         20        28          26           24
Fixed expenses before tax, $ / day              5         5           5             5
Annual number of working days of the facility  300     300        300            300
The minimum return rate of the investment after tax is required to be 20%. What design is accepted
it should be? (Income tax rate can be accepted as 35%)

Answer 1

Particulars	Design I	Design II	Design III	Design IV
Total capital investment	$22000	$24000	$24500	$28000
Production expenses	$20*300 days= $6000	$28*300days= $8400	$26*300days= $7800	$24*300days= $7200
Fixed expenses	$5*300days= $1500	$5*300days= $1500	$5*300days= $1500	$5*300days= $1500
Total expenses	$7500	$9900	$9300	$8700
Percentage of total expenses based on total capital investment	(7500/22000) *100= 34.09%	(9900/24000) *100= 41.25%	(9300/24500) *100= 37.96%	(8700/28000) *100= 31.07%

Because of no other information given, comparing total expenses of each design with its investment. Design IV having the least expense percentage comparing to its total capital investment. So assuming that Design IV will generate more return and it should be accepted among the four designs.