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TOPIC: CAPITAL BUDGETING Case 11 To Close or Continue Operation Goodwill Manufacturing Company operates a plant in Cebu City. The company has been notified that it must install pollution control equipment at the plant at a cost of P4,000,000 or else close the plant. The plant employs 400 people, virtually of whom will lose their jobs if the plant closes. Goodwill Company will make a lump-sum payments of P800,000 to the people put out of jobs if the plant closes. An interested buyer is will to purchase the plant for P400,000, which equals to its book value. Goodwill company could shift to the Bacolod Plant if it closed in Cebu plant, with no increase in total cash production costs. (The increase in Bacolod's cash production costs equals the cash operating costs of the Cebu plant.) However, shipping costs will increase by P900,000 annually because the Bacolod Plant is much farther away from customers than the Cebu Plant. The new equipment has a ten-year useful life with no salvage value. Straight line depreciation is used for tax purposes. Tax rate is 40% and cost of capital is 14%. REQUIRED: 1) Considering only monetary factors, determine whether Goodwill Company should install pollution control equipment or close the plant. Justify your answer. TOPIC: CAPITAL BUDGETING Case 11 To Close or Continue Operation Goodwill Manufacturing Company operates a plant in Cebu City. The company has been notified that it must install pollution control equipment at the plant at a cost of P4,000,000 or else close the plant. The plant employs 400 people, virtually of whom will lose their jobs if the plant closes. Goodwill Company will make a lump-sum payments of P800,000 to the people put out of jobs if the plant closes. An interested buyer is will to purchase the plant for P400,000, which equals to its book value. Goodwill company could shift to the Bacolod Plant if it closed in Cebu plant, with no increase in total cash production costs. (The increase in Bacolod's cash production costs equals the cash operating costs of the Cebu plant.) However, shipping costs will increase by P900,000 annually because the Bacolod Plant is much farther away from customers than the Cebu Plant. The new equipment has a ten-year useful life with no salvage value. Straight line depreciation is used for tax purposes. Tax rate is 40% and cost of capital is 14%. REQUIRED: 1) Considering only monetary factors, determine whether Goodwill Company should install pollution control equipment or close the plant. Justify your

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