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Determine the annual cash flow net of income tax

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Reference no: EM132817847

Question - The Eliz Company is considering the replacement of Machine A with Machine B that will cost P160,000 and will result in annual savings of P40,000 before income taxes because of the expected increase in operating efficiency. Machine B has an estimated useful life of 10 years and salvage of P10,000. Machine A has a book value of P16,000 and a disposal value of P20,000 now.

Straight-line depreciation is used and the company has an average income tax rate of 35%. The minimum desired rate of return on this investment is 20%. The present value of an ordinary annuity of P1 in arrears for 10 periods at 20% is 4.192. The present value of P1 for 10 periods at 20% is 0.162.

Required -

1. Determine the Net Investment

2. Determine the annual cash flow net of income tax.

3. What is the net present value of the investment?

Reference no: EM132817847

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