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If the specialized tools are purchased, they will cost P2,500,000 and will
have a disposal value of P100,000 at the end of their four-year useful life.
Pan Company has a 30% tax rate, and management requires a 12%
after-tax return on investment. Straight-line depreciation would be used
for financial reporting purposes, but for the tax purposes, the following
variable depreciation each year will be used.
Year 1 P 832,500
Year 2 1,112,500
Year 3 370,000
Year 4 185,000
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
production generally averages 100,000 units, confirms the direct labor
and variable overhead cost savings. However, the other company
indicates that it experienced an increase in raw material cost due to the
higher quality of material that had to be used with the new tools. The
other company indicates that its unit product costs have been as follows:
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
TOTAL P2,011,110
TOTAL P2,011,110
TOTAL P2,011,110