chapter 9 Capital Budgeting 48 Required: 249 a. In order to assist the management of Essen in reaching a decision on the proposal, prepare schedule showing the computation of following: 1. Net initial outlay before taxes 2. Net present value before taxes. b. Would you recommend this investment, and why? to ilar 934 n is ent MRT, a passenger train company subsidized by the government, has included a dining car on da the passenger train it operates from Bicol to Manila. Yearly operations of the dining car have shown a the consistent loss, which is expected to persist as follows: Revenues ( in cash) P200,000 Expenses for food, supplies, etc. (in cash) P100,000 Salaries 110,000 210,000 Net loss (ignore depreciation on the dining car itself) P10,000 The Auto-vend Company has offered to sell automatic vending machines to MRT for P22000, less a 13,000 trade-in allowance on old equipment (which is carried at P3,000 book value, and which can be the dining car operation. The useful life of the vending ience elsewhere has led executives to s will be 50% less, so be theDetermine which of the two processes could give the higher net present value. d. Determine the payback period for both processes. Req e. What would be your recommendation for the company? Justify your answers. 9.33 The management of Essen Manufacturing Company is currently evaluating a pig purchase a new and innovative drill press as a replacement for a less efficient piece of equipment, which would then be sold. The cost of the equipment including delivery and Insul P175,000. If the equipment is purchased, Essen will incur costs of 15,00 in removing the roll equipment and revamping service facilities. The present equipment has a book value of Plot on remaining useful life of 10 years. Due to new technical improvements, which have magill equipment outmoded, it presently has a resale value of only P40,000. Additional Information: Management has provided you with the following comparative manufacturing cost tabular Present New Equipment Equipment Annual Production -Units 400,000 500,000 Annual Costs: Labor P 30,000 P 25,000 Operating Costs Depreciation (10% of asset book value) P 10,000 P 17,500 Other 48,000 20.000 P58,000 P37.500 Total P88,000 P62.500 Management believes that if the present equipment is not replaced now, it will have to wait ? years before replacement is justifiable. Both pieces equipment are expected to have a negligible salvage value at the end of 10 years. If the new equipment is purchased, the management of Essen would require a 15% return on the investment before income taxes. The following table lists the present value of an ordinary annuity of P1 at 15%: Period Present Value 0.870 1.626 2.283 2.855 3.352 3.784 4.160 4.487 4.772 5.019
