Problem 1.

The management of ELISA Company plans to replace a sorting machine that was acquired several years ago at a cost of P850,000. The machine has been depreciated to its salvage value of P90,000. A new sorter can be purchased for P2,940,000, 3/10, n/30. The dealer will grant a trade-in allowance of P176,000 on the old machine. Gains and losses on trade-in transactions are not subject to income tax. The cost to repair the old machine can be deducted in the first year for computing income tax. Income tax is estimated at 40% of the income subject to tax. What is the net investment assigned to the new machine?

Problem 2

The Welcome Corporation plans to acquire a new equipment costing P1,340,000 to replace the equipment that is now being used. Freight charges on the new equipment are estimated at P75,000 and it will cost P90,000 to install. Special attachment to be used with this unit will be needed and will cost P64,000. If the new equipment is acquired, operations will be expanded and this will require additional working capital of P310,000. The old equipment had a net book value of P45,000 and will be sold for P25,000. If the new equipment is not purchased, the old equipment must be overhauled at a cost of P320,000. This cost is deductible for tax purposes in the year incurred. Tax rate is 30%. Compute the net investment in the new equipment for decision-making purposes.