Problem
YFP Company has the opportunity to introduce a new product, YFP expects the product to sell for Php75 with variable cost per unit of Php50. The annual fixed costs, excluding the amount of depreciatio n is Php4,500,000. The company expects to sell 300,000 units. To produce the new product line, the company needs to purchase a new machine that costs Php 6,000,000. The new machine is expected to last for four years with a very negligible salvage value. The company has a policy of depreciating its machine for both book and tax purposes for four years. The company has a marginal cost of capital of 13.75% and is subject to tax rate of 40%.
• What is the amount of annual after-tax cash flows?
• What is the machine's net present value?
Assuming that some of the 300,000 units that are expected as sales would be to group of customers
• Who currently buy K-Z, another product of YFP Company. This product K-Z sells for Php35 with variable cost of Php20. How many units of K-Z can YFP afford to lose before the purchase of the new machine becomes unattractive?