Example No$.15$

ABC Corporation is considering the purchase of equipment employing advanced technology to lower the production costs in a product line. At the end of fifth year, management will close down the line and liquidate the remaining assets. The project will require an investment of Php $50,000$ in plant upgrade and equipment and an additional Php $3,000$ in working capital, which will be recovered in full at the end of year $5.$

Over its five$-$year useful life, the new equipment will reduce labor and raw materials usage sufficiently to cut operating costs from Php $10,000$ to Php $8,500.$ It is estimated that the new equipment can be sold for Php $10,000$ at the end of year $5.$ If the new equipment were purchased, the old machine would be sold to another company for Php $10,000$ rather than be traded in for a new equipment. If the old equipment is kept for $5$ more years, the salvage value would be reduced to Php $4,500.$ ABC management uses $10\%$ to discount the cash flows. Decide whether replacement is justified now, ignoring any tax consideration.

Use: Opportunity Cost Approach

Example No$.7$

The original cost of a certain machine is P$150,000,$ has a life of $8$ years with a salvage value of $P9,000.$ How much is the depreciation on the $5$th year, if the constantpercentage of declining value is used:

Answer: $d=10893\mathrm{.}62$

Example No$.14$

XYZ Manufacturing is considering replacing a broken metal cutting machine. Several options have been proposed.

Option $1$: The broken machine can be sold today for $$3,000.$

Option $2$: It can be overhauled completely for $$7,000,$ after which it will produce $$2,500$ in annual cash flows over the next five years. The resale value of the asset at the end of five years is zero.

Option $3$: It can be replaced for $$18,000.$ The life of the replacement machine is five years, and it has an estimated salvage value of $$2,000$ at the end of five years. The anticipated operating cash inflows for each year will be $$5,000.$

If the firm's required rate of return of $12\%,$ what should $xYZ$ do$?$

Use: Cash Flow Approach

Answer: $NP{W}_1=$$$3,000$

$NP{W}_2=$$$2011\mathrm{.}94,NP{W}_3$

$4158\mathrm{.}78$

Choose Option $3($PROVIDE DRAWING OF A CASH FLOW DIAGRAM$)$