• Visayas State University

• ACCTG 102

VALCOM: MODULE 6: CAPITAL BUDGETING

Part 1

Project A:

A new machine to manufacture new product submitted by Production Dept.

The machine costP180,000 with estimated life of 6 years with salvage value of P50,000

to be

depreciated using straight line method. Freight and installation cost estimated to be

P35,000.

This machine can be sold for P45,000 after its estimated life. With this machine,

P125,000 sales

will be generated and a cash expenses of P55,000 will be incurred. Expected rate of

return of the

project is 13%.

A. Net Cash Outlay

Cost of Machine P180,000

Freight and installation cost 35,000

NET CASH OUTLAY P215,000

B. Net cash Inflows

Sales P125,000

Cash Expenses 55,000

Depreciation expense (215,000-

50,000/5)

27,500

Net income before tax P42,500

Income tax (25%) 10,625

Net income after tax 31,875

Depreciation 27,500

NET CASH INFLOWS P59,375

C. Terminal Cash Flow

Proceeds from sale of asset P45,000

Tax effect on gain on sale

(45,000-50,000) x 25% -1,250

TERMINAL CASH FLOW P46,250

Project B:

Computer units submitted by the Admin Department The cost of the package is

P120,000 with an estimated life of 4 years, with no salvage value. The computers will be

depreciated using SYD. After its estimated life, the units can be sold for P20,000. With

these computers, the accounting dept. estimated a yearly savings of P80,000.

Installation and training costs amounted to P15,000 and there will an increase in

supplies inventories amounting to P10,000. Expected rate of return of this project is

15%. The VP Finance is interested to know the necessary cash flows of the two project

proposals. The corporation is subjected to 25 percent tax rate.