Reference no: EM132603257

Effie Company manufactures copier equipment and has the opportunity to replace one of its existing machines with a new model. The existing machine has a net book value of P 120,000 and a market value of P 60,000. It has an estimated remaining life of four years, at which time it will have no salvage value. The company uses straight line depreciation of P 30,000 per year on the machine, and its annual cash operating cost is P 280,000. The new model costs P 500,000 and has a four year estimated life with no salvage value. Its annual cash operating cost is estimated at P 160,000. The firm will use straight line depreciation. The tax rate is 40% and the cost of capital is 12%. The purchase of the new, more efficient machine will enable the company to reduce its investment in inventory by P 80,000.

Question 1: What is the investment required to purchase the new machine.

Question 2: Determine the net present value of the investment.

Question 3: Suppose that the new machine has a 10% salvage value. The company will consider the salvage value in determining annual depreciation. Determine the net present value of the investment.

Question 4: Suppose that the new machine has a 10% salvage value. The company will ignore the salvage value in determining annual depreciation. The applicable tax rate is 40%. Determine the net present value of the investment.