An existing factory must be enlarged or replaced to accommodate new production machinery. The structure was built at a cost of Php 2.6 million. Its present book value, based on straight-line depreciation is Php 700,000 but it has been appraised at Php 800,000. If the structure is altered, the cost will be Php 1.6 million and its service life will be extended by 8 years with a salvage value of Php 600,000. A new factory could be purchased or built for Php 5 million. It would have a life of 20 years and a salvage value of Php 700,000. Annual maintenance of the new building would be Php 160,000 compared with Php 100,000 for the enlarged structure. However, the improved layout of the new building would reduce annual production costs by Php 240,000. All other expenses for the new structure are estimated as being equal. Using an investment rate of 8%, which is a more attractive investment for this firm? Old Building Enlarged Building New Building
Given problem:
An existing factory must be enlarged or replaced to accommodate new production machinery. The structure was built at a cost of Php 2.6 million. Its present book value, based on straight-line depreciation is Php 700,000 but it has been appraised at Php 800,000. If the structure is altered, the cost will be Php 1.6 million and its service life will be extended by 8 years with a salvage value of Php 600,000. A new factory could be purchased or built for Php 5 million. It would have a life of 20 years and a salvage value of Php 700,000. Annual maintenance of the new building would be Php 160,000 compared with Php 100,000 for the enlarged structure. However, the improved layout of the new building would reduce annual production costs by Php 240,000. All other expenses for the new structure are estimated as being equal. Using an investment rate of 8%, which is a more attractive investment for this firm?
- Old Building
- Enlarged Building
- New Building
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