For P450,000, Drax Corporation purchased a new machine with an estimated useful life of five years with P10,000 salvage value. Working capital needed for the machine after 2 years is P20,000 which will be released after 5 years. The machine is expected to produce net income from operations after income tax of 40%. First year - P160,000; Second year - P140,000; Third year - P180,000; Fourth year - P120,000; Fifth year - P100,000. Drax will use the straight-line method to depreciate the new machine. (round-off to 4 decimal places for the PV factor) Discount rate was 10%. What is the profitability index of the machine? A. 1.8993 B. 1.9154 C. 1.9134 D. Answer not given E. 1.9297
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
For P450,000, Drax Corporation purchased a new machine with an estimated useful life of five years with P10,000 salvage value. Working capital needed for the machine after 2 years is P20,000 which will be released after 5 years. The machine is expected to produce net income from operations after income tax of 40%. First year - P160,000; Second year - P140,000; Third year - P180,000; Fourth year - P120,000; Fifth year - P100,000. Drax will use the straight-line method to
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