Question

Problem 2
Whitehall Co. has the opportunity to introduce a new product. Whitehall expects the project to sell for ₱40 and to have per-unit variable costs of ₱27 and annual cash fixed costs of ₱1,500,000. Expected annual sales volume is 200,000 units. The equipment needed to bring out the new product costs ₱3,500,000, has a fouryear life and no salvage value, and would be depreciated on a straight-line basis. Whitehall's cutoff rate is 10% and its income tax rate is 40%.

Required:
1. Find the increase in annual after-tax cash flows for this opportunity.
2. Find the payback period on this project.
3. Find the NPV for this project.

Problem 3
Stockholm Company is considering the sale of a machine with the following characteristics.
Book value ₱120,000
Remaining useful life 5 years
Annual straight-line depreciation ₱24,000
Current market value ₱70,000

If the company sells the machine its cash operating expenses will increase by ₱30,000 per year due to an operating lease. The tax rate is 40%.
Required:
1. Find the cash flow from selling the machine.
2. Calculate the increase in annual net cash outflows as a result of selling the machine

Problem 4
Pepin Company is considering replacing a machine that has the following characteristics.
Book value ₱100,000
Remaining useful life 5 years
Annual straight-line depreciation ₱ ???
Current market value ₱ 60,000

The replacement machine would cost ₱150,000, have a five-year life, and save ₱50,000 per year in cash operating costs. It would be depreciated using the straight-line method. The tax rate is 40%.

Required:
1. Find the net investment required to replace the existing machine.
2. Compute the increase in annual income taxes if the company replaces the machine.
3. Compute the increase in annual net cash flows if the company replaces the machine.

Answer 1

(1) Computation of after tax cash flow:-

Particulars	Cash Flow
Quantity(Units)	2,00,000
Sales (Per Unit)	40
Less:- Variable Cost (Per Unit)	-27
Less;- Fixed Cost (Per Unit) [15,00,000 / 2,00,000]	-7.5
Profit Before depreciation & tax (P.U)	5.5
Total Profit (200000 * 5.5)	11,00,000
Less:- Depreciation (3500000 / 4)	-8,75,000
Profit Before Tax	2,25,000
Less:- Tax @ 40%	-90,000
Profit after Tax	1,35,000
Add:- Depreciation	8,75,000
Cash flow P.A.	10,10,000

(2) Computation of Payback period:-

Formula= total investment / net cash flow per year

= 3500000 / 1010000

=3.46 Year

(3) Computation of NPV of the project:-

Year	Cash Flow	PVAF @10%	Persent VAlue
0	-35,00,000	1	-35,00,000
1-4	10,10,000	3.1698	32,01,498
		NPV	-2,98,502

Decision:- We should not consider this project due to negative NPV.