Bellrome Company is planning to replace an old machine with the following related information: Book value P300,000
Question:
Bellrome Company is planning to replace an old machine with the following related information:
Book value P300,000
Remaining useful life 5 years
The current market value is 150,000
Additional information:
The replacement machine can be acquired at a list price of P500,000. A 5% cash discount is available if the said machine is paid within 30 days from the acquisition date. Freight and installation costs are estimated at P75,000.
Should the company decide not to acquire the new machine, it needs to repair the old one at a cost of P50,000. Otherwise, the additional cost of removing the old unit is estimated at P10,000.
Additional gross working capital of P15,000 will be needed to support the operation planned with the new equipment.
The new machine is estimated to reduce cash operating costs amounting to P150,000 per year and is to be depreciated using the straight-line method over its useful life of 5 years.
Bellrome is subject to a 30% income tax rate.
REQUIREMENTS:
a. What is the net initial cost of investment to be used in decision making?
b. What is the increase in annual net income?
c. What is the increase in annual net cash flows if the company replaces the machine?