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Homework answers / question archive / A machine has been purchased and installed at a total cost of P18,000
A machine has been purchased and installed at a total cost of P18,000.00. The machine will be retired at the end of 5 years, at which time it is expected to have a scrap value of P2,000.00 based on current prices. The machine will then be replaced with an exact duplicate. The company plans to establish a reserve fund to accumulate the capital needed to replace the machine. If an average annual rate of inflation of 3% is anticipated, how much capital must be accumulated? * P15,030.00 P18.548.39 P15.386.00 None of the above
Calculation of Cost of Machinery at the end of Year 5 :-
It is given that, Present value of Machinery = P 18,000
This machinery will be replaced at the end of year 5 with an exact duplicate.
It is given that inflation rate will be 3% p.a.
Then, Value of Machinery at the end of Year 5 will be = P 18,000 × (1.03)^5 = P 20,866.9333374
Scrap Value Determination:-
It is given that Scrap Value at the end of Year 5 will be P 2,000 at Current Prices.
That means Scrap Value at the end of Year 5 will be = (1.03)^5 × P 2,000 = P 2,318.5481486
Determining how much Capital to be Accumulated:-
Cost of Machinery at Year 5 = P 20,866.9333374
(-) Scrap Value at Year 5 = P 2,318.5481486
Net Capital to be Accumulated = P 18,548.3851888
