Reference no: EM132981835
Question - Rabiya, Inc., is considering the purchase of a new machine for use in its production process. The invoice cost of the machine is P2,000,000 and needs an additional P 700,000 to install. This machine is expected to substantially reduce costs in the following items:
Labor costs P700,000
Materials costs 120,000
However, maintenance costs are expected to jump by P6,000 per month if the machine is acquired. The machine would also be overhauled at the end of the third year that would cost P150,000. Its useful life is 5 years, after which it would be sold for its residual value of P180,000. The old machine can be sold for P 70,000. Rabiya, Inc. require a return of at least 14% on investments.
Required -
1. Compute the net annual cash inflows from the new machine.
2. Compute the net present value of the proposed investment.
3. Assume an income tax rate of 40%, determine the net present value of the proposed investment.
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