DeCablo, Inc. owns a machine costing P105,000. This has an estimated useful life of 6 years with a scrap value of P15,000 depreciated using straight line method. After using this for two (2) years the operating efficiency of the machine is decreasing. A repair cost amounting to P30,000 is needed to restore the machine to its normal capacity. The machine can be sold now to a ready buyer for P60,000. The management is contemplating to purchase a new machine now at a cost of P150,000 and can be depreciated over four (4) years with no salvage value using sum of year’s digit (SYD) method. After its economic life of 4 years its market value is P50,000. The company will incurs a shipping and installation of cost of P40,000 and an increase in working capital of P25,000. With this new machine, revenues is expected to increase by P125,000 and cash expenses due to this replacement will also increase by P60,000. Cost of capital is estimated to be 15% and corporate tax of 25% Required: Evaluate the project to determine its acceptability using the following budgeting techniques or methods: Cash payback period Discounted payback period Net present value method (NPV) Internal rate of return (IRR) Modified internal rate of return (MIRR) Prepare your recommendation on whether to buy a new asset

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 10P: Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6...

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DeCablo, Inc. owns a machine costing P105,000. This has an estimated useful life of 6 years with a scrap value of P15,000 depreciated using straight line method. After using this for two (2) years the operating efficiency of the machine is decreasing. A repair cost amounting to P30,000 is needed to restore the machine to its normal capacity. The machine can be sold now to a ready buyer for P60,000.

The management is contemplating to purchase a new machine now at a cost of P150,000 and can be depreciated over four (4) years with no salvage value using sum of year’s digit (SYD) method. After its economic life of 4 years its market value is P50,000. The company will incurs a shipping and installation of cost of P40,000 and an increase in working capital of P25,000.

With this new machine, revenues is expected to increase by P125,000 and cash expenses due to this replacement will also increase by P60,000. Cost of capital is estimated to be 15% and corporate tax of 25%

Required:

Evaluate the project to determine its acceptability using the following budgeting techniques or methods:
- Cash payback period
- Discounted payback period
- Net present value method (NPV)
- Internal rate of return (IRR)
- Modified internal rate of return (MIRR)
Prepare your recommendation on whether to buy a new asset

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