Question

A. UB Company plans to replace a production machine that ·was acquired several years ago. The old machine's acquisition cost was P450,000, with salvage value of P 50,000. The machine being considered is worth P 800,000 and the supplier is willing to accept the old machine at a trade-in value of P60,000. Should the company decide not to acquire the new machine, it needs to repair the old one at a cost of P 200,000. Tax-wise, the trade-in transaction will not have any implication but the cost to repair is tax-deductible. The effective corporate tax rate is 35%.

For purposes of capital budgeting, the net investment in the new machine is ____________________ (Show your solution).


B. Thelma Industries is considering an expansion. The necessary equipment would be purchased for P9 million, and the expansion would require an additional P3 million investment in net operating working capital. The tax rate is 40%.

a. What is the initial investment outlay? __________________. (Show your solution)

b. The company spent and expensed P50,000 on research related to the projected last year.
Would this change your answer? Explain.

c. The company plans to use a building that it owns to house the project. The building could be sold for P1 million after taxes and real estate commissions. How would that fact affect your answer?

Answer 1

Answer:

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