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- Stakeholders
- Chapter 02 Investment Appraisal
- Capital Budgeting Decision (1)
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- Capital Investment Decisions and the Time Value of Money.pdf
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- THE IMPORTANCE OF THE PAYBACK METHOD IN
- NPV
- Business Finance
- Unit 2 ASession 1
- Chp12.ppt
- Revision2-InvestmentAppraisal (2).doc
- Project Appraisal
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LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

Test 1: (50%) Multiple Choices: Select the best answer economic benefits when the capital asset is

available for use

to each of the following questions. Mark only one d) In capital budgeting, planning is important

answer per question by encircling the letter because of possible changes in inflation, the

money supply and the interest rates.

corresponding to your chosen answer.

1) Capital budgeting is the process 6) The capital budget is a (an)

a) Used in a sell or process further decisions a) Plan that coordinates and communications a

b) Of determining how much capital stock to issue company’s plan for the coming year to all the

c) Of making capital expenditures decisions segments of the organization.

d) Of eliminating unprofitable product line b) Plan that assesses the firm’s expenditures

for long-lived assets

c) Plan to insure that there is enough working

2) A capital investment decision is essentially a decision

capital for the company’s need

to exchange current

d) A plan that establishes the firm’s long-term goals

a) Assets for current liabilities

in the context of relevant factors in the firm’s

b) Cash outflows for the promise of receiving environment.

future cash inflows

c) Cash flows from operating activities for future 7) Capital budgeting techniques are least likely to be

cash inflows from investing activities used in the evaluating

d) Cash inflows for future cash outflows a) A disinvestment decision, such as a sale of

unprofitable business segment

3) The primary capital budgeting method that uses b) The acquisition of a new ship by a shipping line

discounted cash flow technique is the c) The adoption of the ABC system in

a) Net present value method allocating costs to product lines

b) Cash payback technique d) The implementation of a major advertising

c) Annual rate of return method program that will have long-term effects on the

d) Profitability index method company.

4) Cost of capital is the 8) The following items are included in the computation

of the net cost of investment, except:

a) Amount the company must pay for its plan

a) The initial cash outlay covering all expenditures

assets

on the investment project up to the time when it

b) Dividends a company must pay on its equity

is ready for use or operation

securities b) Working capital requirement to operate the

c) Cost the company must incur to obtain its capital investment project

capital resources c) Avoidable cost of immediate repairs on old asset

d) Cost the company is charged by investment to be replaced, net of tax

bankers who handle the issuance of equity or d) The book value of the old asset to be

long-term debt securities replaced

5) Which of the following about capital budgeting and 9) In evaluating capital investment proposals, the

capital budget is incorrect? projects expected rate of return is compared with a

a) Capital budgeting is the process of planning hurdle rate, or a desired rate of return. The standard

expenditures for assets, the return on rate may be the weighted-average rate of return the

which are expected to be realized within company must pay to its long-term creditors and

one year. shareholders for the use of their funds. It is the cost

b) Once capital decisions are made, they tend to be of using funds and is more commonly called as

relatively inflexible because the commitments a) Discount rate

extend will into the future. b) Capital

c) In capital budgeting, accurate forecasting is c) Capital expense

needed to anticipate changes in the demand for d) Cost of capital

the product so that the firm may realize full

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

10) Which of the following statements about cash flow b) Mutually-exclusive projects

determination for capital budgeting purposes is c) Mutually-inclusive projects

incorrect? d) Independent projects

a) Relevant opportunity costs are included in the

cash flow forecast 16) A project that when accepted or rejected will not

b) Tax savings due to depreciation expense must be affect the cash flows of another projects refers to as:

considered a) Independent projects

c) Depreciation is relevant because it affects b) Dependent projects

net income c) Mutually exclusive projects

d) Changes in net working capital should be d) Sustaining projects

included in the cash flow forecast

17) A capital investment decision is essentially a decision

11) The discounted cash flow model is ordinarily to exchange current:

considered the best model for long-range decision- a) Assets for current liabilities

making. It may be characterized as follows, except: b) Cash outflows for the promise of receiving

a) The discounted cash flow model considers the future cash inflows

time value of money c) Cash inflows from operating activities for future

b) The discounted cash flow model involves interest cash inflows from investing activities

factors and risk d) Cash inflows for future cash outflows

c) The accounting rate of return and net

present value methods are among the 18) The higher the risk element in a project, the

methods used in the discounted cash flow a) More attractive the investment is

model b) Higher the net present value is

d) The model involves the use of the present value c) Higher the cost of capital is

factors to discount the future cash flows to d) Higher the discount rate required is

present values

19) The normal methods of analyzing investments

12) What does the term capital budgeting means in the a) Cannot be used by not-for-profit entities

context of making capital expenditures decisions? b) Do not apply if the project will not produce

a) The process of choosing assets revenues

b) The process of allocating the funds among assets c) Cannot be used if the company plans to finance

c) The process of acquiring the funds to finance the the project with funds already available

business. internally

d) None of the given choices d) Require forecasts of cash flows expected

from the project

13) The long-term planning process for making and

financing investments that affects a company’s 20) Deciding whether or not an investment meets a

financial result over a number of years is referred to predetermined company standard is called a

as: a) Screening decision

a) Capital budgeting b) Payback decision

b) Strategic planning c) Profitability decision

c) Master budgeting d) Preference decision

d) Long-range planning 21) The primary capital budgeting method that uses

discounted cash flow technique is the:

14) Capital budgeting is the process a) Net present value method

a) Used in a sell or process further decision b) Cash payback technique

b) Of determining how much capital stock to issue c) Annual rate of return method

c) Of making capital expenditures decisions d) Profitability index method

d) Of eliminating unprofitable product line

22) Cost of capital is the:

15) Competing investment projects where accepting one a) Amount the company must pay for its plant

project eliminates the possibility of taking the assets

remaining projects is referred to as: b) Dividends a company must pay on its equity

a) Common projects securities

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

c) Cost the company must incur to obtain its d) Risk analysis

capital requirements

d) Cost the company is charged by investment 29) A major difference between an investment in working

bankers who handle the issuance of equity or capital and one in depreciable assets is that

long-term debt securities. a) An investment in working capital is never

returned, while most depreciable assets have

23) The only future costs that are relevant to deciding some residual value

whether to accept an investment are those that will b) An investment in working capital is returned in

a) Be different if the project is accepted rather full at the end of a project’s life, while an

than rejected investment in depreciable assets has no residual

b) Be saved if the project is accepted rather than value

rejected c) An investment in working capital is not tax-

c) Be deductible for tax purposes deductible when made, nor taxable when

d) Affect net income in the period that they are returned, while an investment in

incurred depreciable asses does not allow tax

deductions

24) In capital budgeting, sensitivity analysis is used to: d) Because an investment in working capital is

a) Determine whether an investment is profitable usually returned in full at the end-of the project’s

b) See how a decision would be affected by life, it is ignored in computing the amount of the

changes in variables investment required for the project.

c) Test the relationship of the IRR and NPV

d) Evaluate mutually exclusive investments 30) Which of the following would not be included as part

of the periodic cash inflows associated with an

25) How should the following projects be listed in their investment project?

order of increasing risk? a) Savings for fixed and variable production costs

a) New venture, replacement, expansion b) Savings in selling, general and administrative

b) Replacement, new venture, expansion costs

c) Replacement, expansion, new venture c) Receipts from sales

d) Expansion, replacement, new venture d) Opportunity costs of undertaking the

projects

26) An approach that uses a number of outcome

estimates to get a sense of the variability among 31) The periodic cash flows associated with an

potential return is investment project include which of the following?

a) The discounted cash flow technique a) Savings in taxes caused by deductibility of

b) The net present value method depreciation on tax return

c) Risk analysis b) Income tax effect of gain (loss) on disposal of

d) Sensitivity analysis existing assets in an assets replacement decision

c) Purchase of assets and freight cost

27) Post-audit of capital projects: d) All of these are periodic cash flows in an

a) Is usually done conclusive investment project

b) Is done using different evaluation technique that

what were used in making the original capital 32) The NPV and IRR methods give

budgeting decisions a) The same decision (accept or reject) for

c) Provide a formal mechanism by which the single investment

company can determine whether existing b) The same choice from among mutually exclusive

projects should be supported or terminated investments

d) All of the given choices c) Different rankings of projects with unequal lives

d) The same rankings of projects with different

28) A thorough evaluation of how well a project’s actual required investments

performance matches the projections made when the

project was proposed is called as 33) The net present value (NPV) model can be used to

a) Pre-audit evaluated and rank two or more proposed projects.

b) Post-audit The approach that computes the total impact on cash

c) Sensitivity analysis

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

flows for each option and then converts these total 39) The relationship between the payback period and IRR

cash flows to their present values is called the is that

a) Differential approach a) Have been higher than the IRR

b) Incremental approach b) A payback period of less than one-half the

c) Contribution approach life of a project will yield an IRR lower than

d) Total project approach the target rate

c) The payback period is the present value factor

34) Which statement is most correct concerning for the IRR

depreciation in capital budgeting analysis? d) A project whose payback period does not meet

a) Depreciation is not a cash flow and does not the company’s cutoff rate for payback will not

affect the tax cash flow meet the company’s criteria for IRR

b) Depreciation is not a cash flow but does

affect the tax cash flow 40) In choosing from among mutually exclusive

c) Depreciation is a cash flow but does not affect investments, the manager should normally select the

the tax cash flow one with the highest

d) Depreciation is a cash flow and does affect the a) Net present value

tax cash flow b) Internal rate return

c) Profitability index

35) If there were no income taxes d) Book rate of return

a) Depreciation would be ignored in capital

budgeting 41) The proper treatment of an investment and inventory

b) The NPV method would not work is to

c) Income would be discounted instead of cash flow a) Ignore it

d) All potential investments would be desirable b) Add it to the required investment in fixed assets

c) Add it to the required investment in fixed assets

36) All other things being equal, as cost of capital and subtract if from the annual cash flows

increases d) Add it to the investment in fixed assets and

a) More capital projects will probably be acceptable add the present value of the recovery to the

b) Fewer capital projects will probably be present value of the annual cash flows

acceptable

c) The number of capital projects that are 42) Which of the following is not a defect of the payback

acceptable will change, but the direction of the method?

change is not determinable just by knowing the a) It ignores cash flows because it uses net

direction of the change in cost of capital income

d) The company will probably want to borrow b) It ignores profitability

money rather than issue stock c) It ignores the present values of cash flows

d) It ignores the pattern of cash flows beyond the

37) Which of the following is true of an investment? payback period

a) The higher the cost of capital, the lower the

net present value 43) The technique which if most concerned with liquidity

b) The lower the cost of capital, the higher the IRR is the

c) The longer the project’s life, the shorter its a) Payback period

payback period b) Net present value technique

d) The higher the project’s net present value, the c) Internal rate of return

shorter its life d) Book rate of return

38) if the present value of the future cash flows for an 44) The profitability index

investment equals the required investment, the IRR a) Does not take into account the discounted cash

a) Equals the cutoff rate flows

b) Equals the cost of borrowed capital b) Is calculated by dividing total cash flows by the

c) Equals zero initial investments

d) Is lower than the company’s cutoff rate return c) Allows comparison of the relative

desirability of projects that require varying

initial investments

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

d) Will never be greater than 1.0. Solution A

Annual savings on expenses P50,000

===================================== Less: additional depreciation

Test 2: (50%) Multiple Choices: Select the best answer (40,000 – 25,000) 15,000

Additional taxable income 35,000

to each of the following problems. Mark only one x Tax rate 40%

answer per problem by encircling the letter Additional tax P14,00

0

corresponding to your chosen answer. Submit

necessary computation to support your answer. 3) If an asset costs P35, 000 and is expected to have a

P5, 000 salvage value at the end of its ten year life.

Failure to support your answer is tantamount to a And generates annual net cash inflows of P5, 000

wrong answer. each year the cash payback period is

a. 8 years

1) Bravado Company is considering to replace its old

b. 7 years

equipment with a new one. The old equipment has a

c. 6 years

net book value of P100, 000 and 4 remaining useful

d. 5 years

years with P25,000 depreciation each year. The old

equipment can be sold at P80, 000. The new

Solution B

equipment costs, P160,000 have a 4 year life. Cash

Initial amount of investment s P35,000

savings on operating expenses before 40% taxes

÷ Annual after tax cash flow 5,000

amount to P50, 000 per year. What is the amount of

Payback period 7 years

investment in the new equipment?

a. P160,000 4) Umali Corporation is considering an investment in a

b. P 72,000 new cheese cutting machine to replace its existing

c. P 80,000 cheese cutter. Information on the existing machine

d. P 68,000 and replacement machine follow:

Initial amount of investment 160,000

0

Less Cash inflow

MV of old equipment 80,00

0 Net annual savings in operating costs 90,000

Tax benefits on loss on sales

(20,000 x .4) 8,000 88,000

Salvage value now of the old machine 60,000

Net investment 72,000

2) Myrid Company is considering replacing its old

years 0

machine with a new and more efficient one. The old

machine has a book value of P100, 000, a remaining

Salvage value of the new machine in 8

useful life of 4 years, and annual straight line

years 50,000

depreciation of P25, 000. The existing machine has a

current market value of P80, 000. The replacement

Estimated life of the new machine 8 years

machine would cost P160, 000 have a 4 year life, and

will save P50, 000 per year in cash operating costs. If

the replacement machine would be depreciated using

What is the expected payback period for the new

the straight line method and tax rate is 40%, what

machine?

should be the increase in annual income tax?

a. 4.44 years

a. P14,000

b. 8.50 years

b. P28,000

c. 2.67 years

c. P40,000

d. 3.78 years

d. P 4,000

Solution D

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

Cost of the new machine P400,00 First year 900,000 (3,600,000)

0

Less Salvage value 60,000 Second year 1,200,000 (2,400,000)

Net investment P340,00

0 Third year 1,500,000 900,000

÷ Annual savings 90,000

Payback period 3.78 Fourth year 900,000 0

machine with an estimated useful life of five years Hence, the Payback period is at the end of 4

with no salvage value at its retirement. The machine periods, wherein, the initial outflows are fully

recovered

is expected to produce cash flow from operations, net

of income taxes as follows;

6) Consider a project that requires cash outflow of P50,

000 with a life of eight years and a salvage value of

First year P900,000

P5, 000. Annual before tax cash inflows amounts to

P10,000. Salvage valued is ignored in computing

Second year 1,200,000

depreciation. Assuming a tax rate of 30% and a

required rate return of 8% what is the payback

Third year 1,500,000

period for the project?

Fourth year 900,000 a. 5.0 years

b. 5.6 years

Fifth year 800,000 c. 6.0 years

d. 6.6 years

Siren will use the sum of the year’s digits method to Solution B

depreciate the new machine as follows; Initial investment P50,00

0

÷ Annual after tax cash

First year P1,500,000

inflow

Cash inflow after tax

Second year 1,200,000 (P10,000 ÷ 70%) 7,000

Add Tax shield on

Third year 900,000 Depreciation

(50,000 ÷ 8 years)

Fourth year 600,000 * 30% 1,875 8,875

Payback period 5.6 years

Fifth year 300,000

7) Machine Manufacturing Company considers a projects

that will require an initial investment of P500,000 and

What is the payback period for the machine? is expected to generate future cash flows of P200,

a. 3 years 000 for year 1 through 3 and P100,000 for year 4

b. 4 years through 7. The project’s payback period is

c. 5 years a. 2.50 years

d. 2 years b. 3.50 years

c. 1.67 years

Solution B d. 3.33 years

Cash inflow Unrecovered

out flow Solution A

Cash inflow Cash outflow

Initial investment (4,500,000) Outflows (500,000)

Cash Inflows

Year 1 200,000 (300,000)

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

Year 2 200,000 (100,000) Solution A

Year 3 200,000 100,000 Outflows (120,000)

Inflows and salvage

Payback period; 2+ (100,000/200,000) 2.50 value

years Year 1 40,000 (80,000)

Year 2 36,000 (44,000)

8) Vinson Industries Inc. requires all its capital Salvage value 28,000 (16,000)

investment projects to have a payback period of 5

years or shorter. Vinson is currently considering an Bailout period: 2 + (16,000/32,000) 2.50

equipment purchase that has an initial cost of P900, years

000. The equipment is expected to have a ten year

10) Consider a project that requires an initial cash

life and a salvage value of P50, 000. Assuming cash

outflows of P500,000 with a life of eight years and

flows are equal, how much annual cash inflows are

salvage value of P20,000 upon its retirement. Annual

necessary in order to meet the payback period

cash inflow before tax amounts to P100,000 and a

requirement?

tax rate of 30 percent will be applicable. The required

a. P180,000

minimum rate of return for this type of investment is

b. P170,000

8 percent. The present value of 1 and the annuity of

c. P190,000

1, discounted at 8 percent for 8 periods are 0.54 and

d. P 90,000

5.747 respectively. Salvage value is ignored in

computing deprecation. The net present value

Solution A

amount to

Initial investment P900,000

÷ Payback period 5 years a. P 7,560

Required annual cash inflows P180,000 b. P10,050

c. P17,606

9) The Dwelight Company plans to invest in a d. P20,050

duplicating machine that costs P120,000. The

following are the expected annual cash inflows that Solution C

are evenly received each month and the estimated Computation of Net Present value

salvage value at any point of each year PV of ATCF; 88,750 x 5.747 510,04

6

PV of after tax salvage Value; 20,000 x 7,560

Year Cash Inflows Salvage Value

0.70 x 0.54

Total 517,60

1 P40,000 P50,000 6

Investment 500,00

2 36,000 40,000 0

Net Present value 17,606

3 32,000 28,000

Before tax cash flow 100,00

4 28,000 20,000 0

Less annual depreciation (500,000 ÷ 8) 62,500

5 25,000 5,000 Book income before tax 37,500

Less income tax (37,500 x 0.3) 11,250

Net book income 26,250

Add back depreciation 62,500

What is the bail out period for this project?

Annual after tax cash inflow 88,750

a. 2.50 years Alternative computation for ATCF

b. 2.43 years (100,000 x .70) + (62,500 x .30) 88,750

c. 2.57 years

d. 1.83 years

11) Vendo Company is planning to buy a coin-operated

machine costing P400,000. For book and tax

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

purposes, this machine will be depreciated P80,000 b. P29,510

each year for five years. Vendo estimates that this c. P22,750

machine will yield an annual inflow, net of d. P26,130

depreciation and income taxes, of P120,000. Vendo

desired rate of return on its investments is 12%. At Solution D

the following discount rates, the NVP’s of the Annual cash inflow net of taxes P6,000

investment in this machine are; x PV factor of an ordinary

annuity for 6 periods at 10% 4.355

Discount rate NPV Initial Investment P26,130

three year project. The company’s expected rate of

14% +1,197 return is 12%. The present value of P1.00 at 12% for

one year is 0.893, for two years is 0.797, and for

16% -708 three years is 0.712. The cash flows, net of income

taxes are P18,000 (present value of P16, 074) for the

18% - 2,474 first year and P22,000 (Present value of P17, 534) for

the second year. Assuming that the rate of return is

exactly 12%, the cash flow net of income taxes for

Vendo’s expected IRR on its investment in this the third year would be

machine is a. P23,022

a. 3.25% b. P 7,120

b. 12.00% c. P10,000

c. 16.00% d. P16,392

d. 15.30%

Solution A

Solution D Investment (Total of PV @ IRR of 12%) P50,00

By using interpolation: 0

Les PV year 1 & 2 (16,704 + 17,534) 33,608

Discount rate Net Present Value s

0.14 1,197 PV of the 3rd cash flow 16,392

IRR 0 ÷ PV of 1 at 12% for 3 years 0.712

0.16 -708 After tax cash flow on third year 23,022

(0.14 – IRR) ÷ (0.14 – 0.16) =1,197 ÷ (1,197

+708) 14) The Miracle Company is planning to purchase a new

(0.14 – IRR) ÷ -.2 = 1,197 ÷ 1,905

machine which it will depreciate for book purposes,

(0.14 – IRR) ÷ -.02 = 0.628

(0.14 – IRR) = 0.628 x -.02 on a straight-line basis over a ten year period with no

0.14 – IRR = 0.013 salvage value and a full year depreciation taken in

IRR = 0.013+0.14 the year of acquisition. The new machine is expected

IRR = 0.153 OR 15.30% to produce cash flow from operations, net of income

taxes of P66,000 a year in each of the next ten

12) Camel Company invests in a machine with a useful years. The accounting (book value) rate of return on

life of six years and no salvage value. The machine the initial investment is expected to be 12 percent.

will be depreciated using the straight-line method. It How much will the new machine cost?

is expected to produce annual cash inflow from a. P300,000

operations, net of income taxes of P6,000. The b. P660,000

present value of an ordinary annuity of P1 for six c. P550,000

periods at 10% is 4.355. The present value of P1 for d. P792,000

six periods at 10% is o.564. Assuming that Camel

uses a time adjusted rate of return of 10% how much Solution A

is the original investment? Annual cash inflow P66,000

a. P10,640

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

÷ Accounting Rate of return 12% Total of present value of depreciation 287,920

Ad Depreciation rate 10% 22% Tax rate 40%

d Present value of net advantage 115,16

8

Initial investment P300,00

0

16) ACR Company, Which operates a school canteen, is

planning to buy a doughnut-making machine for

15) Prime Consulting Inc. operates consulting offices in

P300,000. The machine is expected to produce

Manila, Olongapo and Cebu. The firm is presently

36,000 units of doughnuts per year which can be sold

considering an investment in a mainframe computer for P10 each. Variable cost to produce and sell the

and communication software. The computer would doughnut is P4 per unit. Incremental fixed costs

cost P6 million and have an expected life of 8 years. exclusive of depreciation, is estimated at P56,000 per

For tax purposes the computer can be depreciated year. The doughnut-making machine will be

using either straight line method or Sum of the Years depreciated on a straight-line basis for 5 years to a

Digits (SYD) method over five years. No salvage zero salvage value. The company pays income tax a

value is recognized in computing depreciation rate of 32%.

expense and no salvage value is expected at the end What is the expected annual return (Accounting net

of the life of the equipment. The company’s cost of income) to be earned from the doughnut making

capital is 10 percent and it tax rate is 40 percent. machine?

The present value of annuity of 1 for 5 years is 3.791

a) P108,800

and for 8 periods is 5.335. The present value of 1 b) P128,000

end of each period are: c) P100,000

d) P 68,000

Perio PV Factor Perio PV Factor

d d Solution: D

0

2 0.8264 6 0.5645

Less Variable costs

(36,000 x P4) 144,000

3 0.7513 7 0.5132

Contribution margin 216,000

4 0.6830 8 0.4665

Less FC

The present value of the net advantage of using SYD Cash FC P56,00

method of depreciation with a 5-year life instead of 0

straight line method of depreciating the equipment is

Depreciation

a) P 86,224 (P300,000 ÷ 5 years 60,000 116,000

b) P115,168

c) P215,560 Income b4 tax P100,00

d) P287,893 0

year SYD Straight Difference PV

line

Accounting net income P68,000

1 2,000,000 1,200,000 800,000 727,280

2 1,600,000 1,200,000 400,000 330,560

3 1,200,000 1,200,000 0 0

4 800,000 1,200,000 (400,000) (273,200 17) In relation to problem #16, what is the annual net

) cash inflow from the doughnut-making machine?

5 400,000 1,200,000 (800,000) (496,720 a) P108,800

) b) P128,000

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

c) P100,000

d) P 68,000 Solution: B

Accounting net income P68,000

Incremental depr 17,500

Add Depreciation (non-cash expense) 60,000

Net cash inflow P128,00 Net cash inflows P87,200

0

printing equipment with a more efficient unit. The 20) What is the net income cost of investment in the new

new equipment will cost P400,000, with a five-year equipment for decision-making purposes?

useful life, no salvage value. The old unit was a) P232,000

acquired three years ago for P500,000. The company b) P400,000

uses the straight-line method in depreciable assets. c) P300,000

The old unit is being depreciated at P62,500 per d) P368,000

year. If the new equipment is acquired, the old one

will be sold for P100,000. Otherwise, the company Solution: A

will just continue using it for 5 years. Cash operating Cost of new equipment P400,00

costs are P100,000 and P220,000 for new and old 0

equipment, respectively. Income tax is at the rate of Les Proceed from sales of old

s equipment:

32% of income before tax The increase in annual net

Proceed from sales P100,00

income as a result of acquiring the new equipment is

0

a) P27,200 Tax savings

b) P39,100 (P100,000 – (500,000-

c) P69,700 187,500) * 32% 68,000 168,000

d) P87,200 Net cost of Investment P232,00

0

Solution: C

21) Vhong Corporation has determined that if a new

Savings in cash operating equipment costing P120,000 is purchased, the

cost (P220,000-P100,000) P120,000 company’s net income will increase by P10,000 per

year. If the new equipment will be depreciated using

Les Incremental dep’r.

the straight-line method over a period of six years to

s

a zero salvage value, the payback period is

a) 6.00 years

New equip P80,000

b) 12.00 years

Old equip 62,500 17,500 c) 0.25 years

d) 4.00 years

Savings or income b4 tax P102,500

Solution: D

Les Tax (102,500x32%) 32,800

s Initial investment P120,00

0

Incremental annual income P69,700

÷ Annual net cash inflow

19) In relation to problem #18, what is the expected Net income P10,000

increase in annual net cash inflows if the new

equipment is acquired? Add: Depr 20,000 30,000

a) P 52,200

Payback period 4 years

b) P 87,200

c) P 69,700

d) P149,700

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

22) A new machine is expected to produce the following Required annual net cash inflows P600,000

after-tax cash inflows over a period of 5 years:

After-tax cash inflows Less Depreciation

Year Per Year Cumulative (1,800,000÷10yrs) 180,000

1 P 16,000 P 16,000

Required net income after tax P420,000

2 12,000 28,000

3 20,000 48,000

÷ Tax rate 60%

4 8,000 56,000

5 6,000 62,000 Income b4 tax P700,000

If the machine will cost P40,000, its payback period Add Depreciation 180,000

is

a) 5.00 years Required annual cash savings P880,00

b) 3.00years 0

c) 2.60 years

d) 3.23 years

24) NPC Company paid a cash dividend to its common

Solution: C shareholders over the past 12 months of P2,20 per

Cost of the machine P40,00 share. The current market value of the common

0 stock is P40 per share, and investors are anticipating

Less Cumulative cash flow for 2 years 28,000 the common dividend to grow at a rate of 6%

Amount to be recorded in year 3 12,000 annually. The cost to issue new common stock will

÷ Cash flow in year 3 20,000 be 5% of the market value. The cost of a new

Fraction of year r .6 year common stock will be

a) 11.50%

Hence, the payback period is 2 years + 0.6 years = b) 11.79%

2.6 years. c) 11.83%

d) 12.14%

23) For new equipment acquisition, Melba C Corporation

has set a payback goal of 3 years and a desired rate Solution: D

of return of 25% based on initial investment. An

Unit cost of cash dividend P2.200

equipment to be used in Melba C. Corporation’s x Dividend grow rate 1.060

Forming Department is being evaluated. Data New cost of dividend P2.332

pertaining to the equipment are as follows: ÷ Stock price P40

Cost of the equipment P 1,800,000 x one minus floatation

Useful life 10 years cost (1-.05) .95 38

Salvage value at the end of the 0 .0614

useful life Add Growth rate .0600

Cost of the new stock 0.1214

12.14

Melba C Corporation is subject to 40% income tax

rate. It uses the straight-line method in computing

25) ERC Corporation’s current capital structure is shown

depreciation.

below. This structure is optimal, and the company

To meet Melba C. Corporation’s payback goal, the wishes to maintain it

new equipment must generate savings in annual cash

operating costs of Debt 25%

a) P600,000

b) P880,000 Preferred equity 5%

c) P700,000

d) P420,000 Common equity 70%

Solution: B

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

ERC’s management is planning to build a P75M Debt 5.4% P5,600,000 P302,000

facility that will be financed according to this desired Preferred 6.0% 1,000,000 60,000

capital structure. Currently, P15M of cash is Common 13 8,000,000 1,040,000

available for capital expansion. The percentage of Total P14,600,00 1,402,000

the P75M that will come from a new issue of common 0

Weighted average cost of capital

stock is

(P1,402,000 ÷ P14,600,000) 9.6%

a) 52.50%

b) 50.00%

Dividend pay P1.20

c) 56.25% ÷ Market price of common stock P40

d) 56.00% Dividend yield 3%

Add Growth rate 10%

Solution: D Cost of common stock 13%

Required fund to build the facility P75M

Less Cash already available 15M Current yield of debt .090%

Fund is still needed P60M One minus – tax rate (1-.40) .6%

x Common stock % 70% Cost of debt .054%

Funds to be financed by common stock P42M

÷ Required fund P75M 27) BTO Corporation is planning to buy a vending

Percentage coming from common 56% machine costing P50,000. This machine will be

stock

depreciated over a 5-year period, using the straight

line method. It is estimated that the machine will

26) GTI’s new financing will be in proportion to the

yield an annual cash inflow, net of depreciation and

market value of its present financing is shown below:

income taxes, of P14,000. At the following discount

rates, the net present values of the investment in

Book Value

this machine are:

Discount rate Net present value

Preferred stock (100,000 shares) 1,000,000

10% P3,074

Common stock (200,000 shares) 7,000,000

12% 470

14% -1,938

The firm’s bond are currently selling at 80% of par

generating a current market yield of 9%, and the

16% 4,164

corporation has a 40% tax rate. The preferred stock

is selling at its par value and pays a 6% dividend.

The common stock has a current market value of P40

BTO’s desired rate of return on this investment is

and is expected to pay a P1.20 per share dividend

10%. The accounting rate of return on BTO

this fiscal year. Dividend growth is expected to be

Corporation’s initial investment in this machine is

10% per year. GTI’s weighted average cost of capital

a) 8%

is (round your calculations to tenths of a percent).

b) 10%

a) 13.0%

c) 48%

b) 8.3%

d) 28%

c) 9.6%

d) 9.0%

Solution: A

Net cash inflows P14,000

Solution: C Les Depreciation 10,000

s

Market Net income 4,000

Cost of value of Total cost ÷ Cost of investment 50,000

capital Equity of capital Accounting rate of return 8%

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

Using the normal rate of return of 14 percent the net

28) In relation to problem #27, what is the expected present value for this machine is

payback period of the investment project? (round it a) P12,239

off to the nearest tenth) b) P19,670

a) 5.00 years c) P13,419

b) 0.28 years d) P27,936

c) 12.50 years

d) 3.60 years Solution: B

Period

Solution: D 1 32,000 x 0.87790 28,070.0

8

Investment P50,000 2 32,000x1.05 33,600 x 0.76947 25,854.1

÷ Net cash inflow 14,000 9

Payback period 3.571 or 3 32,000x1.05 35,280 x 0.67497 23,812.9

3.6 ² 4

4 32,000x1.05 37.044 x 0.59208 21,933.0

³ 1

29) Still in relation to problem #27, what is the internal Total 99,670.2

rate of return of the investment project? 2

a) More than 14% Less: Investment 80,000.0

0

b) Less than 12%

Net Present Value 19,670.2

c) More than 12% but less than 10% 2

d) More than 12% but less than 14%

31) Zambales Mines Inc. is contemplating the purchase of

Solution: D a piece of equipment to exploit a mineral deposit that

The present value factor of 3.571 is between 3.605 is located on land to which the company has minerals

for 12% and 3.433 for 14% for 5 periods. Hence, rights. Based on an engineering and cost analysis,

the IRR is between 12% and 14%. the following cash flows associated with operating a

mine in the area are expected

30) By the end of December 31, 2005, Alay Foundation is Cost of new equipment and timbers 2,750,00

considering the purchase of a copying machine for 0

P80, 000. The expected annual cash savings are

expected to be P32, 000 in the next four years. At Working capital acquired 1,000,00

the end of the four years the machine will be 0

discarded without any salvage value. All the cash

savings are state in number of pesos at December Net annual cash receipts* 1,200,00

31, 2006. The company expected that the inflation 0

rate is constantly 5 percent each year. Hence, the

first year’s cash inflow was adjusted for 5 inflation. Cost of construct new road in three 400,000

For simplicity all cash inflows are assumed to be at years

year end.

The present value at 14% of 1 of 4 period is 2.91371. Salvage value of equipment in 4 years 650,000

The present value of 1 at end of each period are;

Period 1 0.87719 *receipts from sales of ore, less out of pocket costs

for salaries, utilities, insurance etc.

Period 2 0.76947

It is estimated that the mineral deposit would be

Period 3 0.67497 exhausted after four years of mining. *At that point

the working capital would be released for

Period 4 0.59208 reinvestment elsewhere. The company’s discount rate

is 20%. The net present value for the project is

a) P454,620

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES

Capital budgeting

Edmund E. Hilario, CPA, MBA

Management Accounting 2

1st

Semester 2017-2018

b) P(79,303)

c) P(561,553)

d) P(204,688)

Solution: B

PV of annual cash receipts (1,200,000 x

2.58872 3,106,463

Add/(Deduct):

PV of salvage value (650,000 x

0.48225) 313,462

PV of return of working capital 482,250

(1,000,000 x 0.48225)

Cost of new equipment & timbers -2,750,000

Working capital -1,000,000

PV of cost of construction of road

(400,000 x 0.5787) -231,480

Negative Net Present Value -79,303

Electronics Company could use to reduce costs in one

of its plants in Angeles City has just come onto the

market. Relevant data relating to the equipment

follows;

Purchase coat of the equipment P432,00

0

provided by the equipment

the equipment?

a) Between 15%and 18%

b) 25.00%

c) 20.83%

d) 12.50%

Solution: D

Annual cash savings P90,000

Les Depreciation (432,000 ÷ 12) 36,000

s

Annual income 54,000

÷ Initial investment 432,000

Simple rate of return 12.5%

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