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MANAGEMENT ADVISORY SERVICES

CAPITAL BUDGETING
THEORY
1. Capital budgeting techniques are least likely to be used in evaluating the
a. Acquisition of new aircraft by a cargo company.
b. Design and implementation of a major advertising program.
c. Trade for a star quarterback by a football team.
d. Adoption of a new method of allocating non-traceable costs to product lines.
2. The “inflation element” refers to the
a. Impact that future price increases will have on the original cost of a capital expenditure.
b. Fact that the real purchasing power of a monetary unit usually increases over time.
c. Future deterioration of the general purchasing power of the monetary unit.
d. Future increases in the general purchasing power of the monetary unit.
3. Mahlin Movers, Inc. is planning to purchase equipment to make its operations more efficient.
This equipment has an estimated useful life of six years. As part of this acquisition, a
P150,000 investment in working capital is required. In a discounted cash flow analysis, this
investment in working capital should be
a. Amortized over the useful life of the equipment.
b. Disregarded because no cash is involved.
c. Treated as a recurring annual cash flow that is recovered at the end of six years.
d. Treated as an immediate cash outflow that is recovered at the end of six years.
4. To approximate annual cash inflow, depreciation is
a. Added back to net income because it is an inflow of cash.
b. Subtracted from net income because it is an outflow of cash.
c. Subtracted from net income because it is an expense.
d. Added back to net income because it is not an outflow of cash.
5. In capital expenditures decisions, the following are relevant in estimating operating costs
except
a. Future costs.
b. Cash costs.
c. Differential costs. d. Historical costs.
6. Which of the following best identifies the reason for using probabilities in capital budgeting
is
a. Different life of projects.
c. Uncertainty.
b. Cost of capital.
d. Time value of money.
7. In capital budgeting decisions, the following items are considered among others:
1. Cash outflow for the investment.
2. Increase in working capital requirements.
3. Profit on sale of old asset
4. Loss on write-off of old asset.
For which of the above items would taxes be relevant?
a. Items 1 and 3 only.
c. All items.
b. Items 3 and 4 only.
d. Items 1, 3 and 4 only.

MSQ-08
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Statements 3 and 1 only. d. None of the above. (a) and (b) d. The length of time for payback using cash flows plus the salvage value to recover the original investment c. the payback period considers depreciation expenses (DE) and time value of money (TVM) as follows: a. An optimal capital budget is determined by the point where the marginal cost of capital is A. The impact of the project on income taxes to be paid. B. 10. C. the discount rate. Statements 2 and 3 only. zero. b. Statements 1 and 2 only. From the above statements. b. c. b. The bailout payback period is a. c. The ARR does not consider the time value of money. which are considered limitations of the ARR concept? a. Cash flow based payback period. Equal to the rate of return on total assets. which of the following factors generally is not important? a. The payback method assumes that all cash inflows are reinvested to yield a return equal to a. d. Which of the following methods measures the cash flows and outflows of a project as if they occurred at a single point in time? a. 2. c. As a capital budgeting technique. D. 15. d. c. not in year 5. 9. Equal to the marginal rate of return on investment. Payback method. The technical services department indicated that this equipment needs overhauling in year 4 or year 5 of its useful life. c. Your company is purchasing a transport equipment as part of its territorial expansion strategy. b. The overhauling cost will be expected during the year the overhauling is done. b. The most likely reason is a. Minimized. The finance officer insists that the overhauling be done in year 4. The ARR is based on the accrual basis. Due statements A and C above. The method of financing the project under consideration. not cash basis. 3. All the 3 statements. The payback period used by firms with government insured loans. the internal rate of return. b. DE relevant irrelevant Irrelevant relevant TVM relevant irrelevant Relevant irrelevant 13. d. 11. MSQ-08 Page 2 . The timing of cash flows relating to the project. The amount of cash flows relating to the project. The profitability of the project is considered. Discounted cash flow.8. Equal to the average cost of capital. b. 12. d. 14. the hurdle rate. The following statements refer to the accounting rate of return (ARR) 1. There is lower tax rate in year 5. c. Capital budgeting. There is higher tax rate in year 5 d. When using one of the discounted-cash-flow methods to evaluate the feasibility of a capital budgeting project. The time value of money is considered.

c. Opportunity cost. Will result in inconsistent errors being made on estimating NPVs such that project cannot be evaluated reliably. Proceeds from the sale of the asset to be replaced.A company had made the decision to finance next year’s capital projects through debt rather than additional equity. Amount of annual depreciation on the asset to be replaced. d. Cutoff rate. 20. Less than the amount of investment d. An advantage of the net present value method over the internal rate of return model in discounted cash flow analysis is that the net present value method a. The benchmark cost of capital for these projects should be a. The after-tax cost of new-debt financing. c. C. Is done because present value tables for continuous flows cannot be constructed. Hurdle rate. The cost of equity financing. Can be used when there is no constant rate of return required for each year of the project. expressed in terms of present value. 24. The weighted-average cost of capital. The common assumption in capital budgeting analysis is that cash inflows occur in lump sums at the end of individual years during the life of an investment project when in fact they flow more or less continuously during those years a. is normally affected by the a. Opportunity cost of capital. Cannot be determined 18. b. Net present value b. Discounted rate of return d. b. b. When using the net present value method for capital budgeting analysis. If a firm identifies (or creates) an investment opportunity with a present value <List A> its cost. The before-tax cost of new-debt financing. B. D. Equal to the amount of investment c.16. A project’s net present value. 22. Uses a discount rate that equates the discounted cash inflows with the outflows. All of the following refer to the discount rate used by a firm in capital budgeting except a. Cost of capital 17. Discount rate. d. b. More than the amount of investment b. List A Greater than Greater than Equal to Equal to List B Increase Decrease Increase Decrease 21. Amount of annual depreciation on fixed assets used directly on the project. d. c. Results in understated estimates of NPV. Cost of capital. Risk-free rate. Results in higher estimate for the IRR on the investment. The excess present value method is anchored on the theory that the future returns. must at least be a. the value of the firm and the price of its common stock will <List B> a. the required rate of return is called all of the following except the A. d. b. Computes a desired rate of return for capital projects. d. b. ignoring income tax considerations. Required rate of return. Uses discounted cash flows whereas the internal rate of return model does not. Payback c. MSQ-08 Page 3 . Carrying amount of the asset to be replaced by the project. c. d. In an investment in plant the return that should keep the market price of the firm stock unchanged is a. 23. 19. c. c.

Accounting rate of return b. d. requires higher rates of return for projects with a life span greater than 5 years. Equals 1 Zero c. D. The cash flows are accelerated and the project life is correspondingly shortened. The NPV and the IRR approaches will always rank projects in the same order. How are the following used in the calculation of the internal rate of return of a proposed project? Ignore income tax considerations. Which of the following characteristics represent an advantage of the internal rate of return techniques over the accounting rate of return technique in evaluating a project? I Recognition of the project’s salvage value.25. Greater than 1 Positive b. Polo Co. C. Less than 1 Positive IRR More than cost of capital Equals cost of capital Less than cost of capital Less than cost of capital 31. 29. c. The discount rate that equates the present value of the expected cash flows with the cost of the investment is the a. Less than 1 Negative d. d. that is. Net present value c. The investment cost decreases without affecting the expected income and life of the project. b. Which of the following would cause the project to look less appealing. a. and III. III Recognition of the time value of money. b. d. c. If a project is found to be acceptable under the NPV approach. II. Which of the following capital budgeting techniques can readily accommodate this requirement? a. 26. b. d. The cash flows are extended over a longer period of time. MSQ-08 Page 4 . If a project is found to be acceptable under the NPV approach. You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. 28. Payback period. Which of the following is always true with regard to the net present value (NPV) approach? A. a. The discount rate increases. Residual sales value of project Exclude Include Exclude Include Depreciation expense Include Include Exclude Exclude 27. B. have a lower present value? a. Projects extending beyond 5 years must earn a higher specified rate of return. c. c. Which of the following combinations is NOT possible? Profitability Index NPV a. I. Internal Rate of Return Yes No No Yes Net Present Value No Yes No Yes 30. II Emphasis on cash flows. it would also be acceptable under the internal rate of return (IRR) approach. Internal rate of return d. I and II. II and III. The NPV and payback approaches will always rank projects in the same order. it would also be acceptable under the payback approach. I only. b.

if both are priced at $1. b. the profitability index is calculated to rank the projects. A ranking procedure on the basis of quantitative criteria may be established by specifying a minimum desired rate of return.500 annually? A. net present value. 34. b.000. The IRRs are equal. That generates cash flows for the longer period of time. and internal rate of return will provide a consistent ranking of the projects. a. d. D. the better the project. d. Project A with three annual cash flows of $1. 37. C. What is the effect of an increase in the cost of capital on these techniques? a. the net present value method will provide a ranking of the projects that is superior to the ranking obtained using the internal rate of return method. Information relating to the company and the investments follow: Fisher rate for the three projects 7% Cost of capital 8% Based on this information. Whose net after-tax flows equal the initial investment. Capital budgeting methods are often divided into two classifications: project screening and project ranking.32. we know that a. the capital budgeting evaluation techniques profitability index. with 3 years of zero cash flow followed by 3 years of $1. The NPVs are equal. If the net present value method is used. one may either calculate the organization’s cost of capital or use a rate generally acceptable in the industry. C. management should give first priority to the project A. hence you are indifferent. D. or Project B. B. 36. Several proposed capital projects which are economically acceptable may have to be ranked due to constraints in financial resources. That has the greater profitability index. b. the least pertinent is this statement. hence you are indifferent. c. the better the project.000 and your discount rate is 15%. all three projects are acceptable. c. the higher the rate. profitability index (PI). B. The lower the index. Which one of the following is considered a ranking method rather than a screening method? MSQ-08 Page 5 . Project B. In selecting the required rate of return. d. If the internal rate of return method is used in the capital rationing problem. 33. When ranking two mutually exclusive investments with different initial amounts. That has the greater accounting rate of return. PP Increase No change No change Decrease PI Decrease Decrease Increase No change SARR Increase No change Decrease No change 35. none of the projects are acceptable. Project A. In ranking these projects. A company is evaluating three possible investments. Payback period (PP). and simple accounting rate of return (SARR) are some of the capital budgeting techniques. c. Which mutually exclusive project would you select. which rate is used in calculating the net present value of each project.

PI will increase with an increase in cash inflows. increasing. Shipping and installation would cost an additional P200. or a decrease in cash outflows.000 c. $150. B.000. Accounting rate of return. C. is considering an investment proposal for P10 million yielding a net present value of P450.000 d. $92. The company uses a discount rate of 12%.000 c. Decrease the initial investment amount to P9. Increase discount rate to 15%. a.000 d.000. decreasing. Inc. The project has a life of 7 years with salvage value of P200. What is the cash flow from selling the machine if the tax rate 40%. b. 40. Which of the following would decrease the net present value? a. $90. and save $75. B. D.000 and 3 years remaining in its useful life. Acme is considering the sale of a machine with a book value of $80. have a 5-year life. $550. $80. The replacement machine would cost $550.000. Velasquez & Co.000.000. investment cost and cash outflows on profitability (present value) index (PI) a. A. c. accounts receivable by P160.000.000 3. What is the effect of changes in cash inflows. $100. d. or an increase in cash outflows. a remaining useful life of 5 years. each of which has its own internal rate of return. decreasing. A company has analyzed seven new projects. Above.000. Diliman Republic Publishers. d. Profitability index. a decrease in investment cost. D. and annual straight-line depreciation of $80. The old press has a book value of P150. $330.000 annually is available.000. 39. $25.0 million. Net present value. C. Above. PI will decrease with an increase in cash outflows. PROBLEMS 1.A. PI will decrease with an increase in cash inflows. Below. PI will increase with an increase in cash inflows. or an increase in cash inflows.000 2 Hatchet Company is considering replacing a machine with a book value of $400.250. increasing. Extend the project life and associated cash inflows.000. The existing machine has a current market value of $400.000 b.000 and accounts payable by P140. a decrease in investment cost. Straight-line depreciation of $25. an increase in investment cost. Below. an increase in investment cost. is considering replacing an old press that cost P800. c. The machine has a current market value of $100. 38. or a decrease in cash outflows. what would be the net investment required to replace the existing machine? a.000 six years ago with a new one that would cost P2. Time-adjusted rate of return. Increase the salvage value. The increased production of the new press would increase inventories by P40.000. Diliman Republic’s net initial investment for analyzing the acquisition of the new press assuming a 35% income tax rate would be MSQ-08 Page 6 .000. It should consider each project whose internal rate of return is _____ its marginal cost of capital and accept those projects in _____ order of their internal rate of return.000. If the replacement machine would be depreciated using the straight-line method and the tax rate is 40%. b.000 per year in cash operating costs.000.000 and could be sold currently for P50. b.

P23. P2.000. The appropriate “end-of-life” cash flow based on the foregoing information is a. Inflow of P30.712. Additional gross working capital of P12. Hooker Oak Furniture Company is considering the purchase of wood cutting equipment. What is the accounting rate of return on original investment rounded off to the nearest percent. Outflow of P10. 22.000 with freight and installation costs amounting to P1. Should the company decide not to acquire the new machine. net of income taxes.000 c.000 b. and for three years is 0. The effective corporate tax rate is 35% of net income subject to tax.500.000 in a three-year project. P2. b. for the third year would be a.893.a. Lor Industries is analyzing a capital investment proposal for new machinery to produce a new product over the next ten years. A company is considering putting up P50. Acquisition cost is P450. P660.250.000 d. the net investment in the new machine is a.0% c.000 to remove the machinery. d.0% 7. P52. the trade-in transaction will not have any implication but the cost to repair is tax-deductible. If the new equipment is not purchased.000 and the supplier is willing to accept the old machine at a trade-in value of P60.000.000 with salvage value of P50. The applicable tax rate is 35%. The net investment assigned to the new machine for decision analysis is a. P800. P50. c.392 d.000.000 Expected economic life in years 5 Salvage value at the end of five years $3. The cash flow. it needs to repair the old one at a cost of P200.000.074) for the first year and P22. P2. Great Value Company is planning to purchase a new machine costing P50.0% d.000 5. plans to replace a production machine that was acquired several years ago. This cost can be avoided by purchasing the new equipment. The loss on retirement of these other assets is P1. The machine being considered is worth P800.000 c.000 Net annual cash inflow $12. 24. net of income taxes will be P18. Other assets that are to be retired as a result of the acquisition of the new machine can be salvaged and sold for P3.000 which will reduce income taxes of P400. for two years is 0. Assuming that the rate of return is exactly 12%.000. The present value of P1.000 4.600 c. P10. Outflow of P17. Outflow of P6. It will require some P30. the machinery must be disposed of with a zero net book value but with a scrap salvage value of P20.450. P610. The company’s expected rate of return is 12%. P16. 40.000.600 6.000.500.797. P540.000. P2.0% b.000 (present value of P16.000 b.000.534) for the second year. Tax-wise. P7.500. MSQ-08 Page 7 . assuming no taxes are paid? a.00 at 12% for one year is 0.120 b. Key Corp. the cash flow. repair of the old unit will have to be made at an estimated cost of P4.200 b.000 The company uses the straight-line method of depreciation with no mid-year convention. 20.000 will be needed to support operation planned with the new equipment. At the end of the ten years. P57. P53. Data on the equipment are as follows: Original investment $30.600.000 d.425.022 8. For purposes of capital budgeting.000 (present value of P17.000 c.600 d. The old unit is to be traded-in will be given a trade-in allowance of P7.

C Corp. The estimated income and costs based on expected sales of P10. A project under consideration by the White Corp.000 per year for five years with no equipment salvage value. it is necessary to acquire a new equipment that will cost the company P100.500 a year for the first three years of the payback period and P3.4331. of P4. To do this.000 die attach machine. what would be the difference in profit before income taxes by acquiring the new machine as opposed to retaining the present one? A.181 b. The new machine is expected to produce cash flow from operations.00 per unit P100.00 per unit 80. If White Corp. but it would be zero after 5 years. Ignore income taxes. One project that is currently under evaluation has a cash flow in the fourth year of its life that has a present value of $10.000 The accounting rate of return based on initial investment is 20% What will be the accounting rate of return based on initial investment of P100.8% d.000 increase 11. has an after-tax cost of capital of 10 percent and a marginal tax rate of 30 percent. $53. P18.868 d.000.000 a year shall be charged to income of the six years of the payback period. $15. APJ. The cost of capital is 12%. 2.375 10.868 b. Depreciation of P3. C Corp.000 Net income P 20.) a.500 a year of the last three years of the payback period. $23. The present machine has a book value of $50.9. have a 5-year life. $15. Considering the 5 years in total.000 (after-tax). The working capital would be liquidated at the end of the project's 10-year life. Variable operating costs would be $100.6048 and at 14% is 3. net of income taxes. P36. what is the present value of the working capital cash flow expected to be received in year 10? a.000 d. and no estimated salvage value.000 units per year are: Sales @ P10.48% 14. The estimated life of the new equipment is five years with no salvage value.000 Costs @ P8.000 per year.000 MSQ-08 Page 8 . is planning to purchase a new machine that will take six years to recover the cost. $40.000 if management decrease its selling price of the new product by 10%? a. would require a working capital investment of $200. The internal rate of return for this investment is a.356 c. 3. is planning to produce a new product. 20% 13. $77.000 b. What is the pre-tax amount of the cash flow in year 4? (Round to the nearest dollar. Its disposal value now is $5. 13. Variable operating costs would be $125. $10. $43. MLF Corporation is evaluating the purchase of a P500. $35. The new machine would cost $90.000 decrease B. 15% d. P12.130 12. How much shall the machine cost? a.000 decrease C. 15. The net present value factor for five (5) years at 12% is 3. Lyben Inc.000. assumes that all cash flows occur at the end of the year and the company uses 11 percent as its discount rate.04% c.000 and a remaining life of 5 years. 10% c. faces a marginal tax rate of 35 percent. Inc. Maxwell Company has an opportunity to acquire a new machine to replace one of its present machines.000.000 c.000. $9.000 increase D.100 c. $36.45% b. 5% b. $23. The cash inflows expected from the investment is P145.000 per year. P24.970 d.

The company’s tax rate is 35%. (P54. d. since the payback period is 3.000. In computing the net present value. Etc. plans to replace its old sing-along equipment.9 years. $0 c. c. The project would generate annual cash inflows of $75. What expected salvage value for the truck would cause the investment to generate a net present value of $0? Ignore taxes. (P120.000 Salvage value.000) c.2 years. Should the company undertake the project? a. Inc.000 and would have no salvage value. is considering the acquisition of a new armored truck. and $15..700) 18. since the payback period extends beyond the life of the project. The company's discount rate is 12 percent.000. What will be the bailout period (rounded) for the new machine? a. Booker Steel Inc. $42. of $36. c. between 8 and 9 years MSQ-08 Page 9 . Yes. with an estimated useful life of 5 years and a salvage value of $10. d. (P124. 1. the company assumed that the truck would be salvaged at the end of the fifth year for $60. No. is considering an investment that would require an initial cash outlay of $400. The machine is expected to produce cash flow from operations. Womark Company purchased a new machine on January 1 of this year for $90.000 a year in each of the next 5 years. the firm is uncertain as to whether it has determined a reasonable estimate of the salvage value of the truck. since the payback period is 4 years or 80% of the useful life of the project.000 16. b. Tropez Co. Yes. $55.4 years. What is the present value of all the relevant cash flows at time zero? a.000 Current salvage value 10. between 5 and 6 years c.000 b. between 6 and 7 years d.000) d. b. It is the start of the year and St. How many years must the annual cash flows be generated for the project to generate a net present value of $0? a. $30.022.000. The firm's discount rate is 8 percent.000) b. a.55 years or 71% of the useful life of the project. 3.978 19.0000 in years 3 and 4. plans to undertake a capital expenditure requiring P2 million cash outlay. The firm has determined that the truck generates a positive net present value of $17.278 d. Year 1 2 3 4 5 P’000 600 700 480 400 400 The founder and president of the candy company believes that the best gauge for capital expenditure is cash payback period and that the recovery period should not be more than 75% of the useful life of the project or the asset. net of income taxes.000. Below are the projected after-tax cash inflow for the five year period covering the useful life. The truck is expected to cost $300. since the payback period is 4 years and still shorter than the useful life of the project. Cramden Armored Car Co.300 Estimated useful life 10 years 10 years The company’s income tax rate is 35% and its cost of capital is 12%.000 38.000 Annual operating costs 56.15. 1. between 7 and 8 years b. Sweets. 16. (P110.000 Accumulated depreciation 55.000 P120.000 in years 1 and 2.4 years.000. No. The machine will be depreciated using the straight-line method. The new machine’s salvage value is $20. 2. These information are available: Old New Equipment cost P70. However. 17. end of useful life 2.

550.'s cost of capital is 12 percent. It uses 16% as hurdle rate in evaluating capital projects.) a. The investment is expected to generate $350. $21. The Salvage Co. The McNally Co.20. d. $119.556. Assume that 30% of the depreciable base will be depreciated in the first year.000 per unit. how much do the annual savings in labor costs need to be to generate a net present value of $0 on the project? (Round to the nearest dollar. b.550. Yes. yes b.5% thereafter. $326. is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.000 units a year for 5 years. a. no 23.000 annually. are $25 million per year. $57.862 2 0. Several proposed capital projects are under consideration. What is the net present value of this project? a. $88.684.000 capital investment? Year Present Value of P1 Present Value of an Ordinary Annuity of P1 1 0.780. $13.225. yes d. $147.487 21.492 b. Should the company proceed with the P320. $17.000. $33. and its marginal tax rate is 40 percent. Sales are expected to be 12.641 2. At the end of 10 years.019. 5% for the next $400. $114. c. If the required rate of return is 12%.117.000.000. No. JJ Corp.605 3 0.000. Salvage Co. $56. no c.000 in annual cash flows for a period of four years.154 b. 40% in the second year. the ship will have no value and will be sunk in some already polluted harbor. The new ship would cost $500.000 and would be fully depreciated by the straight-line method over 10 years. The company has an effective tax rate of 40%. excluding depreciation. The old machine can be sold for $50.154 c. with projected cost and internal rates of return (IRR) as follows: Project Cost IRR A $100. $1. due to NPV of P61. What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered. It has a resale value of P20.000 10.000.750.000 C. due to negative NPV of P1. Drillers Inc.000 at the end of its economic life.511. is evaluating a project to produce a high-tech deep-sea oil exploration device.000 D. $10. and 30% in the third year.5% MSQ-08 Page 10 . The investment required is $80 million for a plant with a capacity of 15.862 0.3. The device will be sold for a price of $12. MCC increases .743 1. The variable cost is $7.136 25.000 24.000 units per year. what is the approximate NPV of the project? A. The required rate of return is 14%. $68. The machine is expected to have zero value at the end of the four-year period. A company's marginal cost of new capital (MCC) is 10% up to $600. Assume Drillers employs straight-line depreciation on all depreciable assets. Savings are expected from the use of machine estimated at P170.246 a. Yes. If the ship produces equal annual labor cost savings over its 10-year life.200 c. due to NPV of P6.000 and another .820.200 d. It has an estimated useful life of 3 years. $69. $26.000 B.550. due to NPV of P11. The present value of the cash inflows on the project is $44. is considering the purchase of a new machine that will cost P320. is considering an investment in a project that generates a profitability index of 1. The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950. and assume that they are taxed at a rate of 36%.000 and fixed costs. Yes.846 22.492 d.

$8. 1.563.5 Assume that Oxford employs straight-line depreciation. $2.8% D $350.000.85498.050. The present value of an ordinary annuity of 1 for 4 periods is 2. Time-adjusted internal rate of return – 14% 5.189 b.000 12.000 D. at 16% = 4.626. Para Co.0% C $450. $6. The machine is expected to provide 15% internal rate of return. $1. $1. P15.000 Residual value at the end of 5 years 10.57 What would be the annual savings needed to make the investment realize a 12% yield? a.. 4. % 25 30 35 Unit price $750 $800 $875 Unit variable cost $500 $400 $350 Fixed cost. and that they are taxed at 35%. millions $7 $4 $3.000 90. what is the NPV of this project. Depreciation is approximately P46. Estimated net annual cash inflows for each of the 8 years – P81. is reviewing the following data relating to an energy saving investment proposal: Cost $50. P5.306 d. Payback Company is considering the purchase of a copier machine for P42. P25. $0 B. $13. P4.B $300.600.344 d.111 c. P5. $4. In order to realize the IRR of 15%. The following forecasts have been prepared for a new investment by Oxford Industries of $20 million with an 8-year life: Pessimistic Expected Optimistic Market size 60.860 B.000 Market share. Assuming an opportunity cost of capital of 14%.415 B. The following data pertain to Sunlight Corp.000 Present value of an annuity of 1 at 12% for 5 years 3.109 D. how much is the estimated before-tax cash inflow to be provided by the machine? A.5% E $400.000 C. Find the required increase in annual cash inflows in order to have the time-adjusted rate of return approximately equal the cost of capital. The company is subject to 40% income tax rate. 3. 2. P6. $1.501 c.000 C.639. P35.000 26.000 13.000 D. whose management is planning to purchase an automated tanning equipment. The salvage value at the end of 4 years is negligible.970 annually.825. The copier machine will be expected to be economically productive for 4 years.889 MSQ-08 Page 11 .000 14. $11.000 140.344 7. Economic life of equipment – 8 years. Cost of capital of Sunlight Corp – 16% 6.000 10. Disposal value after 8 years – nil.871 28.P17.0% What should the company's capital budget be? A. based on expected outcomes? A.501 b.722.60 Present value of 1 due in 5 years at 12% 0. a. The table of present values of P1 received annually for 8 years has these factors: at 14% = 4.505 C.700 29.055.722 27. $8.500. $12.

15. Mulva Inc.250. The first machine costs P50. At what discount rate would Machine 1 equally acceptable as machine 2? A.33% C.30.000 in annual cash flows for a period of six years.000 a year for the next seven (7) years.000 19.85734. and its operating cost will be $1 million per year for its 10-year life.000 25. The required rate of return is 14%. 10% C. has an initial cost of $5 million. respectively. The company must provide bus service for 8 years.000 more cash flow in year one and a P110. 14. -$15. 15% b.and low-risk projects. -$17. the first machine has P155. If Rohan Transport's cost of capital is 17 percent. and will produce cash flows of $28. Berry Products is considering two pieces of machinery. 11% D.79% B. Inflation is not expected to affect either costs or revenues during the next 8 years. after which it plans to give up its franchise and to cease operating the route.54% D. What is the internal rate of return? a. The present value of 1 at 15% end of 1 period and 2 periods are 0. What is the project's internal rate of return (IRR)? A. by what amount will the better project increase the company's value? A.22% C 400.50% The company has a target capital structure which is 40 percent debt and 60 percent equity. 35. has an initial cost of $10 million. $5.000. and that rate is normally adjusted up or down by 2 percentage points for high. What is the approximate PV of costs for the better project? (VD) A. $27.0 years. Smoot Automotive has implemented a new project that has an initial cost.000 in retained earnings. which is of average risk. Plan B. The project has a payback period of 4. 16.350 B. A gas-powered bus has a cost of $55. 17% d. and its annual operating cost over Years 1 to 10 will be $2 million.8 million. 9% B. -$16. The company can issue bonds with a yield to maturity of 10 percent.000. and the current stock price is $40 per share.S. The company has $900.000 per year for 8 years.000 per year for 4 years. -$5. 18.35% B 500. The investment is expected to generate $250.801 34.9 million. The new machine is expected to have zero value at the end of the six-year period. Clean-Up Plan A.000 more than the second machine. $10.000 9. B. such as Baton Rouge and Gainesville.441 C.9 million.86957 and 0. Rohan Transport is considering two alternative buses to transport people between cities that are in the Southeastern U. -$17. and will produce end-of-year net cash flows of $22. 16% c.61% 31. C. The disposal value of the old machine at the time of replacement is zero. The Zeron Corporation recently purchased a new machine for its factory operations at a cost of $921. is considering the following five independent projects: Project Required Amount of Capital IRR A $300.000 8. which is a high-risk project.10% D 550. The company's cost of capital is 11 percent for average projects.000 23. The old machine has a remaining life of six years. A new electric bus will cost $90. Union Electric Company must clean up the water released from its generating plant.000 less cash flow in year two than the second machine. During the two-year life of these two alternatives.25% E 650. D.. The present value of 1 at 8% end of period 1 is 0.92593 and period 2 is 0. The flotation costs MSQ-08 Page 12 . 12% 32.75614.701 D. All cash flows occur at year-end. 18% 33.8 million. and then generates inflows of $10.

$1.000. MSQ-08 Page 13 .48 Present value of an annuity of P1 3.000 4 1. To facilitate computations.30 Your advice is a.400.13 125.000 36. 37.60 3. To proceed due to an estimated IRR of less than 14% but not more than 12%.57 0.750 11.450 3 3. To proceed due to an estimated IRR of more than 16%. Five mutually exclusive projects had the following information: A B C D NPV $500 $(200) $200 $1. To proceed due to an estimated IRR of less than 16% but not more than 14%.000 3 1.52 0. The firm faces a 40 percent tax rate. The Nativity Corporation has the following investment opportunities: Proposal Profitability Index Initial Cash Outlay 1 1.000 The firm has a budget constraint of P300.50. you are asked to determine the internal rate of return and advise if the project should be pursued. c. b.000 2 1.000 IRR 12% 8% 13% 10% Which project is preferred? a. A c.550 13. b. Proposal 4 because it has the lowest profitability index.000 C. PI B Either Either B NPV A B A B 38.000 B.000) 1 4. b. What proposal(s) should be accepted? a. $1.150 12. The following data relate to two capital-budgeting projects of equal risk: Present Value of Cash Flows Period Project A Project B 0 $(10. A tax-exempt foundation. Sincerely Foundation. The foundation’s hurdle rate is 12% and as a consultant of the foundation. Proposal 1 because it has the highest profitability index. Inc.associated with issuing new equity are $2 per share. The foundation estimates that the annual savings from the project will amount to P325.650 2 4.750. d.200.11 175. C b.15 P200. $2.000) $(30.40 3.250 Which of the projects will be selected using the profitability index (PI) approach and the NPV approach? a. B d.08 150.000 D.000. c. $800. The P1 million asset is depreciable over five (5) years on a straight-line basis. Next year's dividend (D1) is forecasted to be $2. Not to proceed due to an estimated IRR of less than 12%. d. intends to invest P1 million in a fiveyear project. What is the size of Mulva's capital budget? A. below are present value factors: N=5 12% 14% 16% Present value of P1 0. Mulva's earnings are expected to continue to grow at 5 percent per year. D 39.

602 Rank the projects in terms of preference: a. 15% b.000 P34. while the present value of an ordinary annuity of P1 is P5. 42.670 W 60. the present value of P1 is P0.650. a tax-exempt entity. What is the net present value of the proposed investment. Daneche's cost of capital is 12%. P5 million  % of actual completion to date. the accounting rate of return is a.3220. Recommend immediate review with the project implementation team to determine the cause of overrun and the corrective actions to be taken.000 and is expected to generate cash savings of P60. 1st G. 2nd G. With the company’s initial investment on the new machine. P69. d.000 above the original cost at completion. d. Proposals 1 and 2 because their total net present values are the highest among all possible proposal combinations. 41. The construction of a waste treatment plant was arrived at after a careful cost-benefit analysis. Information on three (3) investment projects is given below: Project Investment Required Net Present Value X P150.000 c. d. 3rd X. MSQ-08 Page 14 . P5 million plus a cost overrun of about P769. c.000 22. P500. None of the above. Questions 43 and 44 are based on the following information.000 per year in operating costs. P3.005 G 100. 65%  actual cost to date. b. plans to purchase a new machine which they project to depreciate over a ten-year period without salvage value. No need to take any action. b. b. P139. 1st X. 3rd X. None of the above. Wait for the next quarterly status report on the project. Daneche’s. Assuming cost is evenly distributed throughout the construction period. 2nd G.000 13. The new machine will cost P200. About P100.000 less than the original cost at completion. P185.000 d. 3rd W. Proposals 2 and 3 because their total net present values are the highest among all possible proposal combinations. 40. d. Problem 41 and 42 are based on the following information. how much will the completion cost be most likely? a. What would be an appropriate action to take considering the situation in number 28? a. For ten periods at 12%.640 b. The ranking is the same. assuming Daneche uses a 12% discount rate? a. During the construction period a status report was presented for your review:  completed cost as originally estimated. 20% c. c. 1st W.c.75 million 43. 2nd W. Immediately stop further work on the project.980 c. 25% d. The original cost estimate of P5 million. 44.

P30. The payback period for the project is a. and O.654 Internal rate of return 12.11 years d. 5. (M) 45.909 0. is contemplating four projects: L.250 50. P107.13 The company will choose a.14 P(15. The Burgos Corporation is considering investing in a project.000 P40. The company’s desired after-tax opportunity costs is 12%.17 years c.6% Excess present value index 1. Projects M & N.000 b. P35.826 0.850 b.18 years c.683 48.450 49. Idle funds cannot be reinvested at greater than 12%.000 P40. 5.750 c.708) 10. Projects L & M. N.5 years d. P31.540 P59.250 46. MSQ-08 Page 15 .750 c.96 d.751 0. 5. P35. It requires an immediate cash outlay of P100. It has P900.7% 17.000. P108.2% 1. P25. Projects L & N. P34. 5. N & O. Questions 48 through 55 are based on the following information. Projects M.000 before income tax.150 d. P108. M. net cash flow are listed below.000 d. P107. The old car has a book value of P15. c. 3 years b.000. It has a life of four years and will be depreciated on a straight-line basis (no salvage value). The new car costs P120. The net cash flow for year 4 is a. 3.095 years 47. The firm’s tax rate is 25% and requires a return of 10%. 4 years. Income before depreciation is projected to be: YEAR 1 2 3 4 Income before depreciation P30. Beta Company plans to replace its company car with a new one.950 c.Questions 45 and 46 are based on the following information.250 d. The acquisition of the new car will yield annual cash savings of P20. In Thousand Pesos L M N O Initial cost 400 470 380 420 Annual cash flows Year 1 113 180 90 80 2 113 170 110 100 3 113 150 130 120 4 113 110 140 130 5 113 100 150 150 Net present value P7. P54. Income tax rate is 25%. The payback period of the investment is (M) a. 3. P28.000 The present value factors for P1 at 10% is Year 1 2 3 4 Present Value Factor 0. b. P36.02 1.000 P30. The net investment of the new car is a. The capital costs for the initiation of each mutually-exclusive project and its estimated after-tax.000 and its estimated useful life is five years without scrap value.14 years b.000 capital budget for the year. The net cash flow for year 1 is a.666 17. Telephone Corp.6% 0.850 b.000 and can be sold at P12.

The present value of the project’s net cash flow is a. 9% c.75 d.05 55.25 54.98 c. P98.15 b.856. 7% b. The present value of year two’s cash flow is a.51. Payback results only d. P29.151. P104. 0.02 d. 0. 12% d. 1. P101.25 c.747.96 b. c.75 53. The profitability index of the project (rounded to the nearest hundredth) is a.75 d.750. P26. P95. The project would be accepted on the basis of the a. P25.650.863. Accounting rate of return and profitability index results. 1.25 c. Payback and present value results. a and b combined MSQ-08 Page 16 . 15% 52.100.50 b. The accounting rate of return of the project is a. b.750. P23.

A 9. 29. 29. C 17. B 5. D 11. D 19. 43. D 15. B 16. 45. C 14. B 4. B 3. B 21. 30. C 2. 50. 25. A B A A A D B C D D A D A B C D C B B A Problem 1. 24. 52. 37. D 17. 46. 39. 51. D 6. 33. 27. B 12. 40.Answer Sheet Theory 1. 22. D 2. D 4. 31. 27. B 10. 44. 31. D 12. 39. 40. 30. 26. 23. A A B B B B A A C B B B D B B D B D C D 41. D 8. C 7. D 5. 54. 36. B 8. D 7. C 15. A 21. 37. B 9. 48. 22. B 13. B 18. 53. A 16. 35. A 6. C 20. 34. C 20. 24. B 13. 47. B 14. 23. 36. 33. 38. 32. 38. A 18. 55. 49. 25. A 19. D 10. 42. D 11. 34. 26. 28. C 3. C B B C C C A B D B D A C C D MSQ-08 Page 17 . 32. 28. 35.