In order to increase production capacity, Global Industries is considering replacement an existing production machine with a new technologically improved machine effective January 1. The following information is being considered by Global Industries: • The new machine would purchased for P160,000 in cash. Shipping, installation, and testing would cost additional P30,000 • The new machine is expected to increase annual sales by 20,000 units at a sales price of P40 per unit. Incremental operating costs include P30 per unit in variable costs and total fixed costs of P40,000 per year. • The investment in the new machine will require an immediate increase in working capital of P35,000. This cash outflow will be recovered at the end of year 5 • Global uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of 5 years and zero salvage value • Global is subject to a 40% corporate income tax rate Global uses the net present value method to analyze investments and will employ the following factors and rates: Present Value of an Present Value of P1 Ordinary Annuity of P1 Period At 10% At 10% 1 0.909 0.909 0.826 1.736 3 0.751 2.487 4 0.683 3.170 0.621 3.791 Global Industries' discounted annual depreciation tax shield for the year replacement is a. P13,817 O b. P16,762 c. P20,725 d. P22,800 2
In order to increase production capacity, Global Industries is considering replacement an existing production machine with a new technologically improved machine effective January 1. The following information is being considered by Global Industries: • The new machine would purchased for P160,000 in cash. Shipping, installation, and testing would cost additional P30,000 • The new machine is expected to increase annual sales by 20,000 units at a sales price of P40 per unit. Incremental operating costs include P30 per unit in variable costs and total fixed costs of P40,000 per year. • The investment in the new machine will require an immediate increase in working capital of P35,000. This cash outflow will be recovered at the end of year 5 • Global uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of 5 years and zero salvage value • Global is subject to a 40% corporate income tax rate Global uses the net present value method to analyze investments and will employ the following factors and rates: Present Value of an Present Value of P1 Ordinary Annuity of P1 Period At 10% At 10% 1 0.909 0.909 0.826 1.736 3 0.751 2.487 4 0.683 3.170 0.621 3.791 Global Industries' discounted annual depreciation tax shield for the year replacement is a. P13,817 O b. P16,762 c. P20,725 d. P22,800 2
Chapter1: Financial Statements And Business Decisions
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