GROUP III

The sales representative for the manufacturer of

the specialized tools has stated, “The new tools will
allow direct labor and variable overhead to be
reduced by P1.60 per unit.” Data from another
company using identical tools and experiencing
similar operating conditions, except that annual Referring to the figures, the
production generally averages 100,000 units,
confirms the direct labor and variable overhead
production manager stated,
cost savings. However, the other company
indicates that it experienced an increase in raw
“These numbers look great
material cost due to the higher quality of material until you consider the
that had to be used with the new tools. The other
company indicates that its unit product costs have difference in volume. Even
been as follows:
with the reduction in labor
Direct materials P 4.50 and variable overhead cost,
Direct labor
Variable manufacturing overhead
3.00
0.80
I’ll bet our total unit cost
Fixed manufacturing overhead 10.80 figure would increase to
Unit product cost P19.10
over P20 with the new tools.”
Although the old tools being used by Pan Company are now
fully depreciated, they have a salvage value of P45,000.
These tools will be sold if the new tools are purchased;
however if the new tools are not purchased, then the old
tools will be retained as standby equipment. The Company’s
accounting department has confirmed that total fixed
manufacturing overhead costs, other than depreciation, will
not change regardless of the decision made concerning the
valves. However, the accounting department has estimated
that working capital needs will increase by P60,000 if the new
tools are purchased due to the higher quality of material
required in the manufacture of the valve stems.
The present values of 1 at the end of each period
using 12% are:

Period 1 0.89286
Period 2 0.79719
Period 3 0.71178
Period 4 0.63552
PV of annuity of 1, 4 periods 3.03735
Required: COMPUTE
1. Net investment in new tools

2. Annual savings if the new tools will be acquired

3. Is the project acceptable, use the NPV method in your evaluation

4. Discuss the advantage/disadvantage of using the declining

depreciation method
Required: COMPUTE

1. Net investment in new tools

OUTFLOW INFLOW

Salvage Value of old tools,

Purchase price of new tools P2,500,000 Salvage Value of old tools P45,000
P31,500
net of tax

Increase in Working Capital 60,000 Multipled by: 1 – tax rate .70

TOTAL OUTFLOW P2,560,000 TOTAL INFLOW P31,500

NET INVESTMENT [outflow – inflow] P2,528,500

Required: COMPUTE

2. Annual savings if the new tools will be acquired

Total Unit Cost of valve stem 80,000 units x P20
P1,600,000
Cost to make:

Direct Materials P 360,000

80,000 units x P4.5

Direct Labor 312,000

80,000 units x P3.9

Variable Overhead 80,000 units x P1.5

120,000

Decrease in Variable Cost 80,000 units x P1.6

128,000 664,000

Annual Cost Savings 936,000

Required: COMPUTE

Is the project acceptable,

3.

use the Net Present Value

method in your evaluation
Required: COMPUTE Is the project acceptable, use the Net
3.

Present Value method in your evaluation

Annual Cost Savings P936,000

1 – tax rate .70

After-tax annual savings P655,200

PV annuity of 1, 4 periods 3.03735

PV of annual cost savings P1,990,071

Required: COMPUTE Is the project acceptable, use the Net
3.

Present Value method in your evaluation

Annual Cost Savings P936,000

Year Depreciation PV factor PV
1 – tax rate .70

After-tax annual savings P655,200

1 P 832,500 0.89286 743,306

PV annuity of 1, 4 periods 3.03735 2 1,112,500 0.79719 886,874

PV of annual cost savings P1,990,071
3 370,000 0.71178 263,359

4 185,000 0.63552 117,571

TOTAL P2,011,110

Multiplied by: Tax Rate .30

PV of tax benefits from depreciation P 603,333
 Required: COMPUTE Is the project acceptable, use the Net
3.

Present Value method in your evaluation

Annual Cost Savings P936,000

1 – tax rate .70

After-tax annual savings P655,200

PV annuity of 1, 4 periods 3.03735

Salvage Value P100,000
PV of annual cost savings P1,990,071
1 – tax rate .70
Year Depreciation PV factor PV After-tax salvage value P655,200
1 P 832,500 0.89286 743,306

2 1,112,500 0.79719 886,874 PV factor at end of 4 periods 0.63552

3 370,000 0.71178 263,359
PV of annual cost savings P44,486
4 185,000 0.63552 117,571

TOTAL P2,011,110

Multiplied by: Tax Rate .30

PV of tax benefits from depreciation P 603,333

 Required: COMPUTE Is the project acceptable, use the Net
3.

Present Value method in your evaluation

Annual Cost Savings P936,000 Salvage Value P100,000
1 – tax rate .70
1 – tax rate .70
After-tax salvage value P655,200
After-tax annual savings P655,200 PV factor at end of 4 periods 0.63552
PV of annual cost savings P44,486
PV annuity of 1, 4 periods 3.03735

PV of annual cost savings P1,990,071

Working Capital P60,000

Year Depreciation PV factor PV

1 P 832,500 0.89286 743,306 PV factor at end of 4 periods 0.63552

2 1,112,500 0.79719 886,874
PV of working capital P38,121
3 370,000 0.71178 263,359

4 185,000 0.63552 117,571

TOTAL P2,011,110

Multiplied by: Tax Rate .30

PV of tax benefits from depreciation P 603,333

 Required: COMPUTE Is the project acceptable, use the Net
3.

Present Value method in your evaluation

Annual Cost Savings P936,000 Salvage Value P100,000 Working Capital P60,000
1 – tax rate .70 PV factor at end of 4
1 – tax rate .70 periods 0.63552
After-tax salvage value P655,200
After-tax annual savings P655,200 PV factor at end of 4 periods 0.63552 PV of working capital P38,121
PV of annual cost savings P44,486
PV annuity of 1, 4 periods 3.03735

PV of annual cost savings P1,990,071

PV of annual cost savings P1,990,071

Year Depreciation PV factor PV PV of tax benefits from depreciation 603,333

1 P 832,500 0.89286 743,306
PV of annual cost savings 44,486
2 1,112,500 0.79719 886,874
PV of working capital 38,121
3 370,000 0.71178 263,359

4 185,000 0.63552 117,571

TOTAL CASHFLOW P2,676,022
TOTAL P2,011,110 Less: Net Investment 2,528,500
Multiplied by: Tax Rate .30

PV of tax benefits from depreciation P 603,333 NET PRESENT VALUE P147,522

Required: COMPUTE Is the project acceptable, use the Net
3.

Present Value method in your evaluation

NET PRESENT VALUE P147,522

The project is acceptable

since the total cash flow
exceeds net investment.
Required: COMPUTE

4. Discuss the advantage/disadvantage of

using the declining depreciation method
Required: COMPUTE 4. Discuss the advantage/disadvantage of
using the declining depreciation method

DOUBLE DECLINING METHOD STRAIGHT-LINE METHOD

Year Depreciation PV factor PV Cost of new tools P2,500,000

1 P 832,500 0.89286 743,306 Estimated useful life 4 years

2 1,112,500 0.79719 886,874 Annual depreciation P 625,000

3 370,000 0.71178 263,359
PV factor annuity of 1 3.03735
4 185,000 0.63552 117,571
PV of depreciation P1,898,344
TOTAL P2,011,110
Multiplied by: Tax Rate .30
Multiplied by: Tax Rate .30
PV of tax benefits from PV of tax benefits from
depreciation
P 603,333 P569,503
depreciation
Required: COMPUTE 4. Discuss the advantage/disadvantage of
using the declining depreciation method
DOUBLE DECLINING METHOD STRAIGHT-LINE METHOD
Year Depreciation PV factor PV Cost of new tools P2,500,000

1 P 832,500 0.89286 743,306 Estimated useful life 4 years

2 1,112,500 0.79719 886,874 Annual depreciation P 625,000

3 370,000 0.71178 263,359
PV factor annuity of 1 3.03735
4 185,000 0.63552 117,571
PV of depreciation P1,898,344
TOTAL P2,011,110
Multiplied by: Tax Rate .30
Multiplied by: Tax Rate .30
PV of tax benefits from PV of tax benefits from
P 603,333 P569,503
depreciation depreciation

ADVANTAGE OF DOUBLE DECLINING

P 33,830
DEPRECIATION METHOD
QUESTION AND
ANSWER TIME
THANK YOU