VoltesV Company serves food to the employees of BPO industry in Makati City. The owners of VoltesV is considering the acquisition of a new van which cost P3,000,000 and to replace an old van that is use in delivering the food to the work place area of its customers. The old truck was acquired many years ago for P2,200,000 and presently it has a current book value of P1,500,000. If VoltesV purchased the new van, the old truck will be sold to a buyer for P1,400,000. And if VoltesV will not acquire the new van and retain the old one, extensive repairs would be needed that will cost P500,000. For tax purposes, this repair cost will be expensed in the year it was incurred. The tax rate is 32%. Based in the problem above, what will be the Net Cost of Investment for decision making purposes if the new van is purchased?

To determine the Net Cost of Investment for VoltesV if the new van is purchased, we must consider several factors, including the cost of the new van, the proceeds from selling the old truck, and the tax effects of not making repairs on the old truck.

Let's break this down step by step:

1. **Cost of the New Van**: 
   \[
   \text{Cost of the new van} = \text{P}3,000,000
   \]

2. **Proceeds from Selling the Old Truck**:
   \[
   \text{Proceeds from selling the old truck} = \text{P}1,400,000
   \]

3. **Book Value of the Old Truck**:
   \[
   \text{Book value of the old truck} = \text{P}1,500,000
   \]

4. **Loss on Sale of Old Truck**:
   Since the old truck is sold for less than its book value, the loss on sale is calculated as:
   \[
   \text{Loss on sale} = \text{Book value} - \text{Proceeds from sale} = \text{P}1,500,000 - \text{P}1,400,000 = \text{P}100,000
   \]

5. **Tax Benefit from Loss on Sale**:
   Since this loss can reduce taxable income, there is a tax benefit:
   \[
   \text{Tax benefit} = \text{Loss on sale} \times \text{Tax rate} = \text{P}100,000 \times 32\% = \text{P}32,000
   \]

6. **Avoided Repair Costs**:
   If the old truck is not replaced, it would require extensive repairs costing P500,000. Since this would be expensed, it would also provide a tax benefit:
   \[
   \text{Tax benefit from avoided repairs} = \text{Repair cost} \times \text{Tax rate} = \text{P}500,000 \times 32\% = \text{P}160,000
   \]

7. **Net Cost of Investment**:
   The net cost of investment if the new van is purchased is then calculated as:
   \[
   \text{Net Cost of Investment} = \text{Cost of new van} - \text{Proceeds from selling old truck} + \text{Tax benefit from loss on sale} - \text{Tax benefit from avoided repairs}
   \]
   Substituting the values:
   \[
   \text{Net Cost of Investment} = \text{P}3,000,000 - \text{P}1,400,000 + \text{P}32,000 - \text{P}160,000 = \text{P}1,472,000
   \]

Thus, the **Net Cost of Investment** for decision-making purposes if the new van is purchased is **P1,472,000**.

Would you like further details or have any questions about this solution?

Here are 5 follow-up questions to consider:
1. What would be the impact on net cost if the tax rate changed?
2. How does the depreciation of the new van factor into long-term decision-making?
3. What are the potential maintenance costs of the new van compared to the old one?
4. How might changes in the resale value of the old truck affect the decision?
5. What other factors (e.g., fuel efficiency, reliability) might influence the decision beyond the net cost?

**Tip:** When calculating investment costs, always consider both immediate and long-term tax implications as they can significantly affect the total cost.

Learn how to calculate the net cost of investment for VoltesV's decision to purchase a new van, considering factors such as purchase cost, sale proceeds of the old truck, tax benefits, and avoided repair costs. Explore the financial analysis behind this decision-making process.

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