Question

Premiere Company is considering the purchase of a machine to further automate its production line. The machine will cost P600,000 and has a useful life of 5 years. The straight line method of depreciation is used. Premiere expects annual income before depreciation and taxes of P220,000. Premiere’s income tax rate is 25% and its cost of capital is 16%.

Required:

        Determine whether the new machine investment should be accepted using the following: (30 pts)

1. Accounting Rate of Return
2. Payback Period
3. Net Present Value
4. Internal Rate of Return

WITH SOLUTION THANK YOU!

Answer 1

1	Accounting rate of return(ARR)
	=Average Profit/ Average Investment
	=$75,000/ $600,000= 12.50% p.a.
	Calculation of Depreciation
	Depreciation= (Cost-Salvage Value)/Useful life
	Cost	a	$       6,00,000.00
	Salvage Value	b	$                         -
	Useful Life(Years)	c	5
	Depreciation	d=(a-b)/c	$      1,20,000.00
	Income before depreciation and taxes	$       2,20,000.00
	Less: Depreciation		$       1,20,000.00
	PBT		$      1,00,000.00
	Less: Tax		$          25,000.00
	PAT		$          75,000.00
	Less: Depreciation		$       1,20,000.00
	Annual Cashflow		$      1,95,000.00
	ARR		12.50%
2	Analysis of Payback Period
		Year	Net Cashflow	Cumulative Cashflow
		0	$           (6,00,000)	$                         (6,00,000)
		1	$             1,95,000	$                         (4,05,000)
		2	$             1,95,000	$                         (2,10,000)
		3	$             1,95,000	$                             (15,000)
		4	$             1,95,000	$                           1,80,000
		5	$             1,95,000	$                           3,75,000
	Payback Period			3.08 years
	Payback Period = 3 years + $15,000/$195,000 years
	=3 years + 0.08 years
	= 3.08 years
3	Analysis of Net present value
	Particulars	Year	Cashflow	Present value @16% p.a.	Net Present Value
	Cost of new equipment	0	$           (6,00,000)	1.0000	$                (6,00,000)
	Annual cash inflow	1	$             1,95,000	0.862	$                 1,68,103
	Annual cash inflow	2	$             1,95,000	0.743	$                 1,44,917
	Annual cash inflow	3	$             1,95,000	0.641	$                 1,24,928
	Annual cash inflow	4	$             1,95,000	0.552	$                 1,07,697
	Annual cash inflow	5	$             1,95,000	0.476	$                     92,842
	Net present value				$                    38,487
4	Internal rate of return(IRR)
	Particulars	Year	Cashflow
	Cost of new equipment	0	$           (6,00,000)
	Annual cash inflow	1	$             1,95,000
	Annual cash inflow	2	$             1,95,000
	Annual cash inflow	ekkarill92 Next > < Previous Related Solutions Broadway Industries is considering whether to automate one phase of its production line. The automation equipment... Broadway Industries is considering whether to automate one phase of its production line. The automation equipment has a six year life with no residual and will cost $890,000. Projected net cash flows are as follows: Year 1     $ 250,000 Year 2      240,000 Year 3     210,000 Year 4   205,000 Year 5   200,000 Year 6 180,000 Requirement 1 : Compute this project’s Net Present Value (NPV) using Broadway’s 10% hurdle (required) rate. Should Broadway invest in the automation equipment? Year                  Net Cash... Bluebonnet inc is considering the purchase of new equipment that will automate production and thus reduce... Bluebonnet inc is considering the purchase of new equipment that will automate production and thus reduce labor costs. Bluebonnet made the following estimates related to the new machinery. Bluebonnet Cost of the equipment $ 151 comma 000$151,000 Reduced labor costs $ 45 comma 000$45,000 Estimated life of the equipment 1010 years Terminal disposal value ?$0 ?After-tax cost of capital 88 ?% Tax rate 3535 ?% Assume depreciation is calculated on a? straight-line basis for tax purposes. Assume all cash flows... The company makes tasty seafood dumplings and is considering two alternatives to automate its production process.... The company makes tasty seafood dumplings and is considering two alternatives to automate its production process. The data is included below: A B Initial COst $42.500 $70,000 Annual costs O&M $6,000 $4,000 Annual savings $18,500 $20,000 Residual value $12,000 $25,000 Useful life 3 year 6 year Recommend the alternative that you consider the most attractive for this company. Do the analysis using the net present value and annual equivalent value techniques. Show the details of your analysis. QUESTION 97 A company is considering the purchase of a new production line that it has... QUESTION 97 A company is considering the purchase of a new production line that it has estimated will generate the following annual cash flows:  $5,710,498 per year for 8 years, followed by $7,672,287 per year for 2 years, followed by $3,519,326 per year for 15 years. All cash flows will be received at the end of the year. If the company's required rate of return is 12.4%, what is the maximum price at which the company will purchase this new line?... A company needs to purchase a new machine to maintain its level of production. The company... A company needs to purchase a new machine to maintain its level of production. The company is considering three different machines. The costs, savings and service life related to each machine are listed in the table below. Machine A Machine B Machine C First cost $37500 $31000 $35000 Annual Savings $13500 $12000 $12750 Annual Maintenance $3,000 the first year and increasing by $600 every year thereafter 2500 2000 salvage value 5000 11000 13000 Service life 6 years 3 years 3... Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine... Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,900,000 and will last for six years. Variable costs are 35% of sales and fixed costs are $170,000 per year. Machine B costs $5,100,000 and will last for nine years. Variable costs for this machine are 30% of sales and fixed costs are $130,000 per year. The sales for each machine will be $10 million per year. The required return is 10%... Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine... Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,048,000 and will last for six years. Variable costs are 40 percent of sales, and fixed costs are $195,000 per year. Machine B costs $5,229,000 and will last for nine years. Variable costs for this machine are 35 percent of sales and fixed costs are $130,000 per year. The sales for each machine will be $10.1 million per year. The required return... Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine... Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,132,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $270,000 per year. Machine B costs $5,355,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $205,000 per year. The sales for each machine will be $11.6 million per year. The required return... Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine... Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,300,000 and will last for 4 years. Variable costs are 33 percent of sales, and fixed costs are $120,000 per year. Machine B costs $4,460,000 and will last for 7 years. Variable costs for this machine are 32 percent of sales and fixed costs are $130,000 per year. The sales for each machine will be $8.92 million per year. The required return... Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine... Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,072,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $215,000 per year. Machine B costs $5,265,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $150,000 per year. The sales for each machine will be $10.5 million per year. The required return... ADVERTISEMENT Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions PUT IN JAVA PROGRAMMING The StockB class: Design a class named StockB that contains the following... Draw a DFA for the following ( ∑ = {0,1}):                                 Set of all strings with. In the article from Forbes notes that the goal of a leader is not to clone... Many people keep time using a 24 hour clock (11 is 11am and 23 is 11pm,... UNIX ONLY -- DIFFICULT LAB ASSIGNMENT This is an extremely difficult subject for me. Could you... Do you know why your credit card can be refused even though you are profitable? The Following Java expression: S/10 * 10 + 10 – S = C Show that this... ADVERTISEMENT About @ 2020 WizEdu