An existing factory must be enlarged or replaced to accommodate new production machinery. The structure was built at a cost of ₱ 2.6 million. Its present book value, based on straight line depreciation is₱ 700,000 but it has been appraised at ₱ 800,000. If the structure is altered, the cost will be ₱ 1.6 million and its service life will be extended 8 years with a salvage value of ₱ 600,000. A new factory could be purchased or built for ₱ 5.0 million. It would have a life of 20 years and a salvage value of ₱ 700,000. Annual maintenance of the new building would be ₱ 160,000 compared with ₱ 100,000 in the enlarged structure. However, the improved layout in the new building would reduce annual production cost by ₱ 240,000. All other expenses for the new structure are estimated as being equal. Using an investment rate of 8 percent, determine which is the more attractive investment for this firm. Use the following method:
An existing factory must be enlarged or replaced to accommodate new production machinery.
The structure was built at a cost of ₱ 2.6 million. Its present book value, based on straight line
depreciation is₱ 700,000 but it has been appraised at ₱ 800,000. If the structure is altered, the
cost will be ₱ 1.6 million and its service life will be extended 8 years with a salvage value of ₱
600,000.
A new factory could be purchased or built for ₱ 5.0 million. It would have a life of 20 years and a
salvage value of ₱ 700,000. Annual maintenance of the new building would be ₱ 160,000 compared
with ₱ 100,000 in the enlarged structure. However, the improved layout in the new building would
reduce annual production cost by ₱ 240,000. All other expenses for the new structure are estimated as
being equal. Using an investment rate of 8 percent, determine which is the more attractive investment
for this firm. Use the following method:
a) Annual Cost Method
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