The Cap Company is considering the replacement of Machine A with Machine B that will cost P160,000 and will result in annual savings of P40,000 before income taxes because of the expected increase in operating efficiency. Machine B has an estimated useful life of 10 years and salvage value of P10,000. Machine A has a book value of P16,000 and a disposal value of P20,000 now. Straight-line depreciation is used and the company has an average income tax rate of 35%. The minimum desired rate of return on this investment is 20%. Use 3 decimal places for the PV factors. 1. Determine the Net Investment 2. Determine the annual cash flow net of income tax 3. What is the net present value of the investment?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 10P
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The Cap Company is considering the replacement of Machine A with Machine B that will cost P160,000 and will result in annual savings of P40,000 before income taxes because of the expected increase in operating efficiency. Machine B has an estimated useful life of 10 years and salvage value of P10,000. Machine A has a book value of P16,000 and a disposal value of P20,000 now.

Straight-line depreciation is used and the company has an average income tax rate of 35%. The minimum desired rate of return on this investment is 20%. Use 3 decimal places for the PV factors.

1. Determine the Net Investment

2. Determine the annual cash flow net of income tax

3. What is the net present value of the investment?

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