present value of the project is zero, is reached? Problem 1 (Equipment Replacement Sensitivity Analysis) four years. A toy manufacturer who specializes in making fad items has just developed a accuracy of the expected cash operating savings. By how much must these cash savings fall before the point of indifference, the point where net 452 Chapter 13 Problems P50,000 molding machine for automatically producing a special toy. The machine has been used to produce only one unit so far. It is planned to depreciate the P50,000 original cost evenly over four years, after which time production of the toy will be stopped Suddenly, a machine salesman appears. He has a new machine that is ideally suited for producing this toy. His automatic machine is distinctly superior. It reduces the cost of materials by 10 percent and produces twice as many units per hour. It will cost P44,000 and will have zero disposal value at the end of Production and sales would continue to be at a rate of 25,000 per year for four years, annual sales will be P90,000. The scrap value of the toy company's machine is now P5,000 and will be P2,600 four years from now. Both machines will be useless after the 100,000-unit total market potential is exhausted. With its present equipment, the company's annual expenses will be: direct materials, P10,000, direct labor, P20,000; and variable factory overhead, P15,000. Fixed factory overhead, exclusive of depreciation is P7,500 annually, and fixed selling and administrative expenses are P12,000 annually. Required: 1. Assume that the hurdle rate of return is 18 percent. Using discounted cashflow techniques, show whether the new equipment should be purchased. Use a total-project approach and an incremental approach. What is the role of the book value of the old equipment in the analysis? 2. What is the payback period for the new equipment? 3. As the manager who developed the P50,000 molding machine, you the trying to justify not buying the new P44,000 machine. You question the