The first design option needs a machine that has an estimated initial cost of P1,850,000. The machine can be traded in at 18% of the initial cost after 20 years of economic life. The cost of operation and subsequent maintenance are assumed to be P150,000 a year, meanwhile annual tax due is assumed to be 2.5% of initial cost. The second design option shall use a machine that is priced at P1,450,000. It needs an additional payment of 1,600,000 eight years later. The machine needs to be checked for maintenance after one year at a cost of P85,000 and then another year after the initial maintenance, P70,000 is needed for payment. If the economic life is 20 years, and the trade-in value is P600,000, and taxes per annum will be 2% of the first cost, which of the two plans would you recommend? Assume interest rate of 12 percent.
The first design option needs a machine that has an estimated initial cost of P1,850,000. The machine can be traded in at 18% of the initial cost after 20 years of economic life. The cost of operation and subsequent maintenance are assumed to be P150,000 a year, meanwhile annual tax due is assumed to be 2.5% of initial cost. The second design option shall use a machine that is priced at P1,450,000. It needs an additional payment of 1,600,000 eight years later. The machine needs to be checked for maintenance after one year at a cost of P85,000 and then another year after the initial maintenance, P70,000 is needed for payment. If the economic life is 20 years, and the trade-in value is P600,000, and taxes per annum will be 2% of the first cost, which of the two plans would you recommend? Assume interest rate of 12 percent.
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