# Question) equipment by a new one.

The new equipment is operationally efficient and will result in savings in operating costs estimated at R beginning of the year. The equipment dealer states that most companies use a 4-year life while depreciating equipment with no s quarter of the year, only 60 per cent of the estimated annual savings would be obtained in the first year. The company will incur a the old equipment to the new one. The equipment currently being used has a book value of Rs. 20,000. A review of its condition reveals that it can be used for an a is disposed off now. However, it will have no salvage value after 4 years. The company uses the declining balance method of depreciation. The equation is subject to 10 per cent depreciation together wi taken into account in the first year, and the corporate tax rate and required rate of return are 45 per cent and 20 per cent respect shifting expresses are allowed as a deductible item of expense for tax purposes in the year in which they are incurred.

Calculation Of Cash Outflow Cost of new equipment Add: Shifting expenses 30000 Less: Tax benefit 10500 Less: Sales proceeds of sold equipment Incremental cash flow

300000 19500 5000 314500

Depreciation 10%

Discounting Factor 15% 1.15 Calculation of Depreciation base of new equipment: WDV of existing equipment 20000 Add: Cost of new equipment 300000 320000 Less: Sale proceeds of existing equipment 5000 Amount on which depreciation will be charged 315000 Less: WDV of existing equipment 20000 Base of incremental depreciation 295000

Determination of NPV CFAT D.F@ 15% PV

36295 82044.756 124779 0.572 Total PV(cash inflow) Less: Cash outflow NPV 67739.Year 1 Year 2 Year 3 Year 4 77900 0.268706 .55736 315605.13043 94752.2687 314500 1105.1 0.870 125310 0.658 124301.21797 71069.

30.00.000 annually.000 in transferring production activities from als that it can be used for an additional 4 years. The firm would receive Rs 5. It will cost Rs. Cash operating Savings Less: Incremental depreciation Taxable earning Less: Taxes Add: Depreciation Determination of CFAT Year 1 90000 29500 60500 12100 EAT 48400 29500 CFAT 77900 Year 2 150000 26550 123450 24690 98760 26550 125310 . Assuming that the full year’s depreciation is er cent and 20 per cent respectively.000 net of removal costs if it r cent depreciation together with other assets in the block. what action should XYZ Ltd’s management take? Assume further that ch they are incurred. The company will incur a one-time expense of Rs.50. 1. As the equipment will be operational during the second year. 3.000 and will be purchased at the epreciating equipment with no salvage value.Brittania Is considering a proposal to replace an existing piece of operating costs estimated at Rs.

105.27 .27 314.00 \$1.500.605.Npv inflow less: outflow \$315.

1 .6 21505.5 124301.5 25698.Year 3 150000 23895 126105 25221 100884 23895 124779 Year 4 150000 21505.9 20% 102795.5 45% 128494.

Except for the cost incurred in a additional processing costs are as follows: variable Rs 5 per gallon of waste put into process.870 45652.157 Year 3 84375. Additional processing would howeve be computed by reducing balance method @ 25 %.000 20000. and it is assumed that all of the waste processed in a given year will be sold in that very year. 3 processing. 15 per gallon if it was processed further.000 29531. Manufacturing Advertising EBT Less taxes CFAT Total present Value 50000.276 .000 Depreciation Tax DF PV Total PV Year 1 150000.174 Year 2 112500. discovered that the waste could be sold for Rs.000 30000. There are no other assets in the 25% block.000 52500.250 0.Centum chemical company limited is presently paying an outside firm Rs 1/Gallon to dispose of the waste material resulting from co. waste that is not proce each year.000 0.658 19417. confronted with the choice of disposing off the waste or processing it further and selling it seeks yo Present value of Cash inflows Increase in sales revenue Add Reduction in disposal costs Less Incremental costs Variable Fixed. fixed (excluding depreciation)-Rs.756 29773. The management.000 39375.000 0.

870 0.572 12663. Except for the cost incurred in advertising Rs.756 0.250 22148.350 0.000 21000. 20000 per year no change in the present selling and administrative expenses is expecte ss.000 160000.000 Sale(units) 10000. waste that is not processed further will have to be disposed off at the present rate of Rs 1/gallon.250 150000. Estimates indicate that 1000 cessing it further and selling it seeks your advice.441 107506. In costing the new product general factory overheads will be allocated at the rate of Rs n that very year.000 Tax 0.ose of the waste material resulting from its manufacturing operations. At normal operating capacity the waste is about 40000 gallons per year r.000 10000. which alternative would you recommend? Assume that the firms cost of capital is 15% and it Dep 0.049 TDF Year 4 63281.000 additional Investment 600000. 600000 in new equipment which would have an estimated life of 5 years block.000 39000. fixed (excluding depreciation)-Rs.048 Tax advantage due to short term capital loss Gross Present value Less cash outflow(Additional Investment) Net Present value(NPV) .438 0.658 0. Additional processing would however require an investment of Rs.352 100000.497 3.000 130734.000 60000. 30000 per year.572 0.

depreciation would dministrative expenses is expected if the new product is sold.840 . There will be no losses in allon. 1/gallon.is about 40000 gallons per year . The details of will be allocated at the rate of Rs.000 -328724. 189843.160 600000.750 33035. 35% tax on its income. After spending Rs 40000 on research the have an estimated life of 5 years and no salvage value.064 271275. on an avg. Estimates indicate that 10000 gallons of the new product could be sold firms cost of capital is 15% and it pays.

Sign up to vote on this title