1. Keith Hale Company is evaluating a proposal to purchase a new machine that would cost P200,000 and have a salvage value of P20,000 in four years. It would provide annual operating cash savings of P20,000, as follows:

Old Machine New Machine

Salaries P80,000 P72,000

Supplies 14,000 10,000

Maintenance 18,000 10,000

Total P112,000 P 92,000

If the new machine is purchased, the old machine will be sold for its current salvage value of P40,000. If the new machine is not purchased, the old machine will be disposed of in four years at a predicted salvage value of P4,000. The old machine's present book value is P80,000. If kept, in one year the old machine will require repairs predicted to cost P70,000.

Keith Hale's cost of capital is 14 percent.

Required: Should the new machine be purchased? Why or why not?