ILLUSTRATIVE PROBLEM 1

Bag-You Company plans to replace a unit of equipment that was acquired three (3) years ago and is now recorded at a net book value of P 65, 000.
This equipment can be sold now for P 75, 000. Tax rate is 25%.

New equipment can be acquired from Bee-Cool Company at a list price of P 200,000
. Bee-Cool will grant a 2% cash discount if the equipment is paid for within 30 days from acquisition date.
Shipping, installation and testing charges to be paid are estimated at P 14, 000.

Other assets with a book value of P 12, 000 that are to be retired because of the acquisition of the new machine can be salvaged and sold for P 10, 000.
Additional working capital of P 18, 000 will be needed to support operations planned with the new equipment.

How much is the initial cost of net investments for decision-making purposes?

Outflow Inflow
NEW ASSET
Acquisition Costs, net of discount (200kx2%=196k) 196,000.00
Other Direct Costs 14,000.00 210,000.00

OLD ASSET
Proceeds from Sales 75k+10k= 85,000.00
Tax on gain on sale 10,000.00 25% 2,500.00
Tax on loss on sale 2,000.00 25% 500.00
Trade in Value
Avoidable repairs, net of tax
Removal cost, net of tax - 83,000.00

WORKING CAPITAL
Increase in Working Capital 18,000.00
Decrease in Working Capital 18,000.00
230,500.00 85,500.00

145,000.00 145,000.00
ILLUSTRATIVE PROBLEM 2

The management of Star-Luck Cinema plans to install coffee vending machines costing P 200, 000 in its movie house.
Annual sales of coffee are estimated at 10, 000 cups at a price of P 15 per cup.
Variable costs estimated at P 6 per cup, while incremental fixed cash costs, excluding depreciation, at P 20, 000 per year.
The machines are expected to have a service life of 5 years, with no salvage value. Depreciation will be computed on a straight-line basis.
The company’s income tax rate is 30%. REQUIRED: Assuming that the vending machines are installed, determine:

a. The increase in annual net income.

b. The annual cash inflows that will be generated by the project

Cash operating Income after tax 70,000.00 70% 49,000.00

Tax shield on Incremental Depreciation 40,000.00 30% 12,000.00
Operating Cash flows after tax 61,000.00
 ARR Payback Period

LESS:
( )
70k= ( )

LESS:

Average 21% 3.28 years

SRR 11% years months days
3 3 11