Question

Problem 1
Acme is considering the purchase of a machine. Data are as follows:
Cost- ₱160,000
Useful life- 10 years
Annual straight-line depreciation ₱ ??? Expected annual savings in cash operation costs- ₱33,000
Acme's cutoff rate is 12% and its tax rate is 40%.

Required:
1. Compute the annual net cash flows for the investment.
2. Compute the NPV of the project.
3. Compute the IRR of the project.

Answer 1

	Yr0	Yr1	Yr2	Yr3	Yr4	Yr5	Yr6	Yr7	Yr8	Yr9	Yr10
Cost	(160,000)
Savings		33,000	33,000	33,000	33,000	33,000	33,000	33,000	33,000	33,000	33,000
Depreciation	(16,000)	(16,000)	(16,000)	(16,000)	(16,000)	(16,000)	(16,000)	(16,000)	(16,000)	(16,000)	<---160000/10
Gross savings	17,000	17,000	17,000	17,000	17,000	17,000	17,000	17,000	17,000	17,000	<--Savings-depreciation
Tax @40%	(6,800)	(6,800)	(6,800)	(6,800)	(6,800)	(6,800)	(6,800)	(6,800)	(6,800)	(6,800)	<--Gross savings*40%
After tax savings	10,200	10,200	10,200	10,200	10,200	10,200	10,200	10,200	10,200	10,200	<--Gross savings-tax
Add depreciation	16,000	16,000	16,000	16,000	16,000	16,000	16,000	16,000	16,000	16,000	<--Depreciation aded back as it is a non cash expense
Net Cash Flows	(160,000)	26,200	26,200	26,200	26,200	26,200	26,200	26,200	26,200	26,200	26,200	<--After tax savings+depreciation
NPV @12%	(11,964.16)	<--Using Excel NPV formula
IRR	10.14%	<--Using Excel IRR formula

The above table gives the case facts along with the answers

NPV is negetinve as IRR is lower than the cut off rate of 12%

Please reach out for any clrifications