Four years ago, an ore-crushing unit was installed at a mine which cost P81,000. Annual operating costs for this unit are P3,540. This unit was estimated to have a life of 10 years. The quantity of ore to be handled is to be doubled and is expected to continue at this higher rate for at least 10 years. A unit that will handle the same quantity of ore and have the same operating costs as the one now in service can be installed for P75,000. This unit will have a useful life of 6 years. A unit with double the capacity of the one now in use can be installed for P112,000. Its life is estimated at 6 years and its annual operating costs are estimated at P4,950. The present realizable value of the unit now in use is P26,000. All units under consideration will have an estimated salvage value at retirement age of 12% of the original cost. Interest rate 20%, annual taxes and insurance are 2.5% of the original cost. What would you recommend?

Four years ago, an ore-crushing unit was installed at a mine which cost P81,000. Annual operating costs for this unit are P3,540. This unit was estimated to have a life of 10 years. The quantity of ore to be handled is to be doubled and is expected to continue at this higher rate for at least 10 years. A unit that will handle the same quantity of ore and have the same operating costs as the one now in service can be installed for P75,000. This unit will have a useful life of 6 years. A unit with double the capacity of the one now in use can be installed for P112,000. Its life is estimated at 6 years and its annual operating costs are estimated at P4,950. The present realizable value of the unit now in use is P26,000. All units under consideration will have an estimated salvage value at retirement age of 12% of the original cost. Interest rate 20%, annual taxes and insurance are 2.5% of the original cost. What would you recommend?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 7P

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