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have a two year life. The project will provide a 10% internal rate of

return, and is expected to have a P40,000 cash inflow the first year

and a P50,000 cash inflow in the second year. What investment is

required in the project?

2. The Habagat Inc. is planning to spend P600,000 for a machine that it

will depreciate on a

straight-line basis over a ten-year period with

no disposal value. The machine will generate cash flow from

operations of P120,000 a year. Ignoring income taxes, what is the

accounting rate of return on the net initial investment?

3. Hop is considering the sale of a machine with a book value of

P80,000 and 3 years remaining in its useful life. Straight-line

depreciation of P25,000 annually is available. The machine has a

current market value of P50,000. What is the cash flow from selling

the machine if the tax rate is 40%?

4. Amcare is considering the sale of a machine with a book value of

P160,000 and 3 years remaining in its useful life. Straight-line

depreciation of P50,000 annually is available. The machine has a

current market value of P200,000. What is the cash flow from selling

the machine if the tax rate is 40%?

5. Craten Armored Car Co. is considering the acquisition of a new

armored truck. The truck is expected to cost P300,000. The

company's discount rate is 12 percent. The firm has determined that

the truck generates a positive net present value of P17,022. However,

the firm is uncertain as to whether it has determined a reasonable

estimate of the salvage value of the truck. In computing the net

present value, the company assumed that the truck would be

salvaged at the end of the fifth year for P60,000. What expected

salvage value for the truck would cause the investment to generate a

net present value of P0? Ignore taxes.

6. BRGY Assembly, Inc. is considering the purchase of an automatic

wire bonder which cost P750,000. It has a ten year life without any

salvage value. BRGY would save P200,000 in labor costs annually

as a result of the use of the new machine. Power cost would however

increase P25,000 annually. The cost of capital is 16%. The present

value factor for 10 years at 16% is 4.8332. The present value of the

net annual cost savings is

capital budgeting project that has an internal rate of return of 20%.

The only cash outflow for this project is the initial investment. The

project is estimated to have an 8 year life and no salvage value. Cash

inflows from this project are expected to be P100,000 per year in

each of the 8 years. Congener's discount rate is 16%. What is the net

present value of this project?

8. The Able Company is considering buying a new donut maker. This

machine will replace an old donut maker that still has a useful life of 2

years. The new machine will cost P2,500 a year to operate, as

opposed to the old machine, which costs P2,700 per year to operate.

Also, because of increased capacity, an additional 10,000 donuts a

year can be produced. The company makes a contribution margin of

P0.02 per donut. The old machine can be sold for P5,000 and the

new machine costs P25,000. The incremental annual net cash inflows

provided by the new machine would be:

9. Virginia Company invested in a four-year project. Virginia's discount

rate is 10%. The cash inflows from this project are:

Year

Cash Inflow

1

P4,000

2

P4,400

3

P4,800

4

P5,200

Assuming a positive net present value of P1,000, what is the amount

of the original investment?

10. Para Corporation is reviewing the following data relating to an energy

saving investment proposal:

Initial investment.................... P50,000

Life of the project................... 5 years

Salvage value........................ P10,000

Annual cash savings.............. ?

What annual cash savings would be needed in order to satisfy the

company's 12% required rate of return?

11. The management of Elamin Corporation is considering the purchase

of a machine that would cost P365,695 and would have a useful life of

9 years. The machine would have no salvage value. The machine

would reduce labor and other operating costs by P61,000 per year.

The internal rate of return on the investment in the new machine is:

12. Boe Corporation is investigating buying a small used aircraft for the

use of its executives. The aircraft would have a useful life of 9 years.

The company uses a discount rate of 10% in its capital budgeting.

The net present value of the investment, excluding the salvage value

of the aircraft, is -P439,527. Management is having difficulty

estimating the salvage value of the aircraft. To the nearest whole peso

how large would the salvage value of the aircraft have to be to make

the investment in the aircraft financially attractive?

13. Trovato Corporation is considering a project that would require an

investment of P48,000. No other cash outflows would be involved.

The present value of the cash inflows would be P51,840. The

profitability index of the project is:

14. The management of Lanzilotta Corporation is considering a project

that would require an investment of P263,000 and would last for 8

years. The annual net operating income from the project would be

P66,000, which includes depreciation of P31,000. The scrap value of

the project's assets at the end of the project would be P15,000. The

payback period of the project is closest to:

15. Jonette, Inc., is considering the purchase of a machine that would

cost P240,000 and would last for 5 years, at the end of which, the

machine would have a salvage value of P48,000. The machine would

reduce labor and other costs by P62,000 per year. Additional working

capital of P7,000 would be needed immediately, all of which would be

recovered at the end of 5 years. The company requires a minimum

pretax return of 17% on all investment projects. What is the net

present value of the project?

16. The Rapp Company is considering buying a new machine which will

require an initial outlay of P15,000. The company estimates that over

the next four years this machine would save P6,000 per year in cash

operating expenses. At the end of four years, the machine would have

no salvage value. The company's required rate of return is 14%. What

is the net present value of the project?

The Moore Corporation is considering the acquisition of a new machine.

The machine can be purchased for P90,000, it will cost P6,000 to

transport to Moores plant and P9,000 to install. It is estimated that the

machine will last 10 years, and it is expected to have an estimated

salvage value of P5,000. Over its 10-year life, the machine is expected to

produce 2,000 units per year with a selling price of P500 and combined

materials and labor costs of P450 per unit. Federal tax regulations permit

machines of this type to be depreciated using the straight-line method

over 5 years with no estimated salvage value. Moore has a marginal tax

rate of 40%.

17. What is the net cash outflow at the beginning of the first year that

Moore Corporation should use in a capital budgeting analysis?

18. What is the net cash flow for the third year that Moore Corporation

should use in a capital budgeting analysis?

19. What is the net cash flow for the tenth year of the project that Moore

Corporation should use in a capital budgeting analysis?

Henderson Inc. has purchased a new fleet of trucks to deliver its

merchandise. The trucks have a useful life of 8 years and cost a total of

P500,000. Henderson expects its next increase in after-tax cash flow to

be P150,000 in Year 1, P175,000 in Year 2, P125,000 in Year 3, and

P100,000 in each of the remaining years.

20. Ignoring the time value of money, how long will it take Henderson to

recover the amount of investment?

21. What is the payback reciprocal for the fleet of trucks?

22. Assume the net cash flow to be P130,000 a year. What is the

payback time for the fleet of trucks?

23. The following data are available on a proposed investment project:

Initial investment

P142,500

Annual cash inflows

P 30,000

Life of the investment

8 years

Required rate of return

10%

The internal rate of return, interpolated to the nearest hundredth of a

percent, would be:

24. Overland Company has gathered the following data on a proposed

investment project:

Annual cash flows

Life of the equipment

Salvage value

Discount rate

The internal rate of return on this investment is:

P150,000

P 40,000

10 years

-010%

annual labor costs by P30,000. The machine has an expected life of 10

years with no salvage value. The machine would be depreciated

according to the straight-line method over its useful life. The company's

marginal tax rate is 30 percent.

25. Assume that the company will invest in the machine if it generates an

internal rate of return of 16 percent. What is the maximum amount the

company can pay for the machine and still meet the internal rate of

return criterion?

26. Assume the company pays P250,000 for the machine. What is the

expected internal rate of return on the machine?

27. Two projects being considered are mutually exclusive and have the

following projected cash flows:

Year

Project A Cash Flow

Project B Cash Flow

0

-P50,000

-P50,000

1

15,625

0

2

15,625

0

3

15,625

0

4

15,625

0

5

15,625

99,500

If the required rate of return on these projects is 10 percent, which would

be chosen and why?

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