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 0.751 2.487 0.683 3.170 5 0.621 3.791 The overall discounted cash flow impact of Global Industries' working capital investment for the new production machine would be O a. P(7,959) O b. P(10,080) O c. P(13,265) O d. P(35,000) N34 in 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 0.751 2.487 0.683 3.170 5 0.621 3.791 The overall discounted cash flow impact of Global Industries' working capital investment for the new production machine would be O a. P(7,959) O b. P(10,080) O c. P(13,265) O d. P(35,000) N34 in 2
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1mM
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Transcribed Image Text: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
Ordinary Annuity of P1
Period
At 10%
At 10%
1
0.909
0.909
0.826
1.736
0.751
2.487
0.683
3.170
0.621
3.791
The overall discounted cash flow impact of Global Industries' working capital investment for the
new production machine would be
a. P(7,959)
b. P(10,080)
c. P(13,265)
d. P(35,000)
N345
2
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