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Determine which is the more attractive investment for firm

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Question: An existing factory must be enlarge or replaces to accommodate new production machinery. The structure was built at a cost of P1,300,000. Its present book value, based on straight line depreciation is P350,000 but it has been appraised at P400,000. If the structure is altered, the cost will be P800,000 and its service life will be extended 8 years with a salvage value of P180,000. A new factory could be built for P1,800,000. It would have a life of 20 years and a salvage value of P200,000. Annual maintenance cost of the new building would be P36,000 compared with P24,000 in the enlarge structure. However, the improved layout in the new building would reduce annual production cost be P40,000. All other expenses for the two structures are estimated as being equal. Using an investment rate of 24%. Determine which is the more attractive investment for this firm by annual cost pattern.

Reference no: EM132741104

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