Salvage Co. is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost P500,000 and would be fully depreciated by the straight-line method over 10 years. At the end of 10 years, the ship will have no value and will be sunk in some already polluted harbor. The Salvage Co.'s cost of capital is 12 percent, and its marginal tax rate is 40 percent. If the ship produces equal annual labor cost savings over its 10-year life,

1.what is the present value index of the of the project should IRR be equal to the cost of capital?

2.how much do the annual savings in labor costs need to be to generate a net present value of P0 on the project? (Round to the nearest peso.)

Problem 2:

It is the start of the year and St. Tropez Co. plans to replace its old sing-along equipment. These information are available:

Old

New

Equipment cost

P70,000

P120,000

Current salvage value

10,000

-

Salvage value, end of useful life

2,000

16,000

Annual operating costs

56,000

38,000

Accumulated depreciation

55,300

-

Estimated useful life

10 years

10 years

1. The company's income tax rate is 35% and its cost of capital is 12%. What is the present value of all the relevant cash flows at time zero?