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Answer: B

Initial amount of investment 160,000

Less Cash inflow (decrease in outflow) at period 0:

MV of old equipment 80,000

Tax benefits on loss on sales (20,000 x .4) 8,000 88,000

Net investment 72,000

. Answer: D

ATCF = Net investment Payback period

ATCF (840,000 3.326)252,555


Net income (252,555 140,000)112,555
Before-tax income (112,555 0.60) 187,592
Before-tax savings (187,592 + 140,000)327.592
The computation of after-tax cash flows, given the amount of investment and internal rate of return or PV of
annuity of 1 discounted at IRR is the reverse of the computation of payback period. Remember that the
payback method, though a nondiscounted technique, is closely related to internal rate of return because the
payback period is exactly the present value of annuity of 1 if they are discounted using the internal rate of
return.

. Answer: A

Annual savings on expenses P50,000


Less: Additional depreciation (40,000 25,000) 15,000
Additional taxable income 35,000

Additional tax (35,000 x 40%) P14,000

Additional depreciation can be easily calculated by subtracting the book value of the old machine from the
cost of new machine and then the difference divided by the useful life (160,000 100,000) 4 = 15,000.

10. Answer: B

Year SYD Straight Line Difference Present Value


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
4 800,000 1,200,000 (400,000) (273,200)
5 400,000 1,200,000 (800,000) (496,720)
Total present value of difference in depreciation 287,920
Tax Rate 40%
Present value of net advantage 115,168

. Answer: B

SYD SL Difference Present Value

1 150,000 90,000 60,000 53,568

2 120,000 90,000 30,000 23,916

3 90,000 90,000 - 0

4 60,000 90,000 (30,000) (19,066)

5 30,000 90,000 (60,000) (34,046)

Total of present values of depreciation 24,372

Tax rate 40%

Present value of net advantage 9,749


SYD method provides a higher present value on tax benefits because of less amount of tax during year 1 & 2.
In year 4 and 5, the use of SYD requires higher taxes but their equivalent present values are lower already.

. Answer: D

Annual cost savings 90,000

Less depreciation (432,000 12) 36,000

Annual income 54,000

Simple Rate of Return: 54,000 432,000 12.5 %

. Answer: A

The useful life of the project can be calculated by using the computational pattern for Accounting Rate of
Return:

Net investment 106,700

Divide by Depreciation expense

CFAT 20,000

Less: Net income (106,700 x 5%) 14,665 5,335

Average life (in years) 7.28

* 10% ARR based on average investment = 5% ARR based on initial investment

. Answer: B

ARR = Average annual net income Average Investment


Annual after-tax cash flow 40,000

Less Depreciation 20,000

Net Income 20,000

Divide by Average Investment (200,000 + 180,000)/2 190,000

ARR: 10.5%

The problem asked for the average accounting rate of return for the first year of assets life.

. Answer: D

The average (accounting) rate of return is determined by dividing the annual after-tax net income by the
average cost of the investment, (beginning book value + ending book value)/2.

After tax income (P7,200 - (P7,200 x 30%)) P 5,040

Average investment: (P66,000 + 16,000) 2 P41,000

Accounting rate of return: P5,040/P41,000) 12.3%

. Answer: A

(ATCF Depreciation) Initial investment = Accounting Rate of Return


Let X = Initial investment
(66,000 0.10X) X = 0.12
66,000 - .10X = .12X
.22X = 66,000
X = 300,000

. Answer: A

Net Income: = 66,000 - .10X

AAR = NI/ Investment

.12 = (66,000 - .10X) / X

.12X = 66,000 - .10X

.22 X = 66,000

X = 300,000

. Answer: D

Net Income (280,000 x 15%) 42,000

Add back depreciation 35,000

ATCF 77,000

. Answer: B

Payback period = Initial amount of investment Annual after-tax cash flows

P35,000 P5,000 = 7 years

. Answer: B

Net investment 50,000

Divide by CFAT (10,000 x 0.7) (50,000 8 x 0.3) 8,875

Payback period 5.6 years

. Answer: D

Cumulative cash flows end of Year 1 (450,000) 254,520 (195,480)

Discounted cash flow for Year 2 173,460

Cumulative cash flows, end of Year 2 ( 22,020)

Break-even time 2 + (22,020 105,140) 2.21 years

. Answer: D

Cost of the new machine 400,000

Salvage value of old machine at period zero 60,000

Net investment (Outflows) 340,000

Divide by cash flow after tax 90,000


Payback period 3.78 years

. Answer: B

Cash Inflow Unrecovered Outflow


Outflows (4,500,000)
First year 900,000 (3,600,000)
Second year 1,200,000 (2,400,000)
Third year 1,500,000 ( 900,000)
Fourth year 900,000 0

Payback Period: At the end of 4 periods, the initial outflows are fully recovered.
Note to the CPA Candidates: A modified question for this problem is to compute the Present Value of the net
advantage of using sum-of-the-years digits of depreciation instead of straight-line method.

. Answer: C

Cash inflows Investment

Period 0 (99,300)

Period 1 (75,000 25,000) x .6 30,000 (69,300)

Period 2 ( 30,000 x 1.10) 33,000 (36,300)

Period 3 (33,000 x 1.10) 36,300 -0-

At the end of the third year, investment is fully recovered.


The net investment of 99,300 is net of tax benefit, (165,500 x .6)

. Answer: C

Before-tax cash flow = 40,000 + 35,000 75,000

Payback period: 300,000 75,000 4 years

. Answer: C
There are two cash flows at time zero: P120,000 outflow and P14,000 inflow.
Net cash outflow (120,000 14,000) = 106,000

. Answer: C

Computation of Cash Flow After-tax

CFBT 100,000 x 0.7 70,000

Depreciation tax shield 62,500 x 0.3 18,750

CFAT 88,750

Computation of Net Present Value:

PV of ATCF: 88,750 x 5.747 510,046

PV of After-tax Salvage Value: 20,000 x 0.70 x 0.54 7,560

Total 517,606

Investment 500,000

Net Present Value 17,606

The problem assumed that the salvage value is ignored in the computation of annual depreciation so that the
annual cash flows will be greater. The problem did not include among the choices the assumption that salvage
value will be deducted from the cost in computing the amount of annual depreciation.

. Answer: B

Annual revenues 400,000

Less cash operating costs 104,800

Cash flow before tax 295,200

Less Depreciation (1M 5) 200,000


Income before tax 95,200

Less income tax (40%) 28,080

Net income 57,120

Add back depreciation 200,000

ATCF 257,120

PV of ATCF, n=5; k=10% 257,120 x 3.7908 974,690

Investment 1,000,000

Negative Net Present Value ( 25,310)

The manner of financing the project is not considered in the analysis of capital investment. Investment must
be separate from financing. It is a normally committed error in the application of capital budgeting
techniques where financing strategy is considered. The explicit or implicit cost of financing the project is
taken care of the discounting process.

. Answer: A

Present value of cash returns: (30,000 x 0.90909) x 5 periods 136,364

Net investment 99,300

Net present value 37,064

Note: Because the constant growth rate and the discount rate are both 10%, the present value for each period
is constant.

. Answer: B

Savings (2 workers, each P10,000 for 3 months) 2 x P10,000 x 3 P60,000

Depreciation (175,000 25,000) 5 years P30,000

After-tax cash savings: (60,000 x 0.75) + (30,000 x 0.25) P52,500

Present value of after-tax cash savings (52,500 x 3.60478) P189,250

Present value of Salvage Value (25,000 x 0.56743) 14,186

Total 203,436

Investment 175,000

Net Present Value P 28,436

. Answer: B

Computation of net investment:

Cash purchase price 300,000

Less: MV of old machine 80,000

Tax shield on loss on sale (40,000 x 0.32) 12,800 92,800

Net investment 207,200

Annual cash savings before tax (240,000 160,000) 80,000

Additional depreciation (300,000 120,000) 4 45,000


Additional taxable income 35,000

Less Additional tax (35,000 x 0.32) 11,200

Net income 23,800

Add back depreciation 45,000

After-tax cash flow 68,800

Alternative computation for ATCF:

(80,000 x 0.68) + (45,000 x 0.32) 68,800

Present value of ATCF (68,800 x 3.23972) 222,893

Investment 207,200

Net Present Value 15,693

. Answer: B

PV of annual cash receipts 1,200,000 x 2.58872 3,106,463

PV of salvage value 650,000 x 0.48225 313,462

PV of return of working capital 1,000,000 x 0.48225 482,250

Cost of new equipment and timbers (2,750,000)

Working capital (1,000,000)

PV of cost of construction of road 400,000 x .5787 ( 231,480)

Negative net present value (79,303)

. Answer: B

Period Nominal Cash Savings PV Factor Present Value


1 32,000 0.87790 28,070.08
2 32,000 x 1.05 33,600 0.76947 25,854.19
3 32,000 x 1.052 35,280 0.67497 23,812.94
4 32,000 x 1.053 37,044 0.59208 21,933.01
Total 99,670.22
Investment 80,000.00
NPV 19,670.22
Note that all the annual cash inflows are adjusted by one period.

. Answer: B

The solution used total analysis approach in computing present value.

Retain the Old Machine:

Present value of annual cash outlay

CFAT (300,000 x P0.38) + P21,000 = P135,000

PVCFAT (135,000 x 3.6847) P497,435

Present value of salvage value (7,000 x 0.41044) ( 2,873)

Total P494,562

Buy New machine:


Present Value of Annual cash outlay
CFAT (300,000 x P0.29) + P11,000 = P98,000

PVCFAT P98,000 x 3.6847) P361,100

Salvage value of new machine, end of 6 years(P20,000 x 0.41044) ( 8,209)

Investment in new machine (120,000 40,000) 80,000

Total P432,891

. Answer: B

The purpose of profitability index is to compare two projects profitability by reducing the present value per 1
peso of investment. Therefore, the ratio of 4.35526 @ 10% to 4.11141 @ 12% indicated the profitability index.

Profitability index: 4.35526/4.11141 = 1.06

. Answer: B

PV of annuity of 1 at IRR (1 1.12386)5 3.57057

PV of annuity of 1 at MCC (1 1.11055)5 3.69079

After-tax cash flows 10,000 (3.69079 3.57057) 83,180.84

Investment: 83,180.84 x 3.57057 297,000

Profitability index (297,000 + 10,000) 297,000 1.034

A shorter calculation of the Profitability Index can be made by:

3.69079 3.57057 = 1.034

. Answer: D

In discounting the annual cash inflow by the IRR, the NPV = P0

The net present value of ZERO is 14% and 16%. For better time management, the candidate is expected not
to do detailed calculation of finding out the exact rate.

The use of interpolation indicated that the IRR is 15.3%:


Discount Rate Net Present Value
0.14 1,197
IRR 0
0.16 -708

(0.14 IRR) (0.14 0.16) = 1,197 ( 1,197 + 708)


(0.14 IRR) -.02 = 1,197 1905
(0.14 IRR) - .02 = 0.628
(0.14 IRR) = 0.628 x -0.02
0.14 IRR = 0. 013
IRR = 0.153 or 15.30%
Note: Since at the IRR, NPV is zero, the answer can only be between 14% & 16%, since only one of the choices,
satisfy the criteria, the answer is (D).

. Answer: B

The payback period that corresponds to the projects internal rate of return of 12 percent is 4.968. Therefore,
the amount of investment must equal the product of the payback period and the net cash flows:

Investment: (4.968 x 20,000) = P99,360

. Answer: D

The amount of investment: the PV of annuity at IRR


4.355 x 6,000 = 26,130

. Answer: C

Present value of cash inflows equals amount of investment at 10% IRR.

P20,000 x 3.791 = P75,820

. Answer: A

ATCF: P1,500,000/3.60472 416,121

Depreciation 300,000

Net income: 416,121 300,000 116,121

Before-tax income: 116,121/0.60 193,535

Fixed costs 500,000

Contribution margin: 193,535 + 500,000 693,535

Unit sales 693,535 (100 - 60) 17,338

. Answer: B

Contribution margin (per No. 23) 693,535

Divide by sales volume 20,000

Contribution margin per unit P34.68

Add variable cost per unit 60.00

Selling price per unit P94.68

Alternative Solution:

Cash inflow before tax based on present price: (20,000 x 40) 200,000 600,000

After-tax cash inflow (600,000 x 0.6) + (300,000 x 0.4) 480,000

Present value of ATCF (480,000 x 3.60478) 1,730,294

Investment 1,500,000

Net present value (present price) 230,294

Annual excess ATCF due to excess price (230,294 3.60478) 63,885

Before-tax excess cash inflow (63,885 0.6) 106,475

Excess selling price: 106,475 20,000 5.32

Reduced selling price to achieve IRR of 12% (100 5.32) 94.68

. Answer: C

Annual after-tax cash flow 500,000/5.6502 88,492

Depreciation 500,000/10 50,000

Net income 38,492

Income before tax 38,492/0.6 64,154


Depreciation 50,000

Cash savings before tax: 64,154 + 50,000 114,154

. Answer: A

The amount of annual cash flows can be solved by equation:

NPV = PV of annual CF Investment

1,750 = 2.4771CF 2.4018CF

1,750 = 0.1753CF

CF = 9,980

. Answer: A

Investment 120,000

Less Present value of salvage value (12,000 x 0.3855) 4,626

Present value of Annual Cash Inflows 115,374

Minimum Annual Cash Flows (115,374 6.1446) 18,776

. Answer: B

Present value of annual cash flows at IRR (81,000 x 4.639) 375,759

Investment 81,000 x 4.344 351,864

Difference 23,895

Annual increase in cash flows 23,895/4.344 5,501

. Answer: A

Investment (Total of present value @ IRR of 12%) 50,000

Less PV, year 1 & 2 (16,074 + 17,534) 33,608

PV of the 3rd cash flow 16,392

After-tax cash flow, third year 16,392/0.712 23,022

. Answer: B

The net present value = PV of excess salvage value less PV of decrease in after-tax cash flow

Let X = the excess salvage value

7,003 = 0.56743X [3.60478 x (0.2X * 0.4)

7,003 = 0.56743X 0.2883824X

7,003 = 0.2790476X

X = 25,096

Required salvage value: 50,000 25,096 = 24,904

. Answer: B

Cost of equipment 750,000


Less PV of tangible benefits 100,000 x 5.01877 501,877

PV of annual intangible benefits 248,123

Amount of annual intangible benefits 248,123/5.01877 49,440

. Answer: B

To be acceptable, the project should yield a net present value of zero. The negative net present value must be
offset by the present value of annual intangible benefits.

Present value of intangible benefits P184,350

PV of annuity of 1 at 10% for 10 years 6.145

Annual net intangible benefits P30,000

. Answer: A

The indifference rate (crossover or fisher rate) refers to the rate at which the net present values of the 2
alternatives are indifferent or equal.

The easier test of the rate is to look for IRR (using trial and error technique) of the investment difference.

Difference 80,000 48,000 35,225

PV inflows (3,200 1.1264)6 (12,922)

PV inflows (15,200 1.1264)10-6 (22,303)

Difference NIL
Alternative Solution:
Project X Project Y
PV of after-tax cash flows
(12,000 1.1264)6 48,455
(15,200 1.1264)10 83,680
Investment 48,000 83,225
Net Present Value 455 455

. Answer: B

The determination of the indifference point, which is 10%, for the two projects can be made through the use of
trial and error estimation.
Machine 1 Machine 2

PV of Difference in ATCF

Year 1 155,000 1.10 140,909.10 (140,909.10)

Year 2 (110,000 1.10)2 ( 90,909.10) 90,909.10

Net difference 50,000.00 ( 50,000.00)

Difference in investment ( 50,000.00) 50,000.00

NPV NIL NIL

. Answer: C
15% Discount Rate

Machine 1 Machine 2

PV of Difference in ATCF

Year 1 155,000 x 0.86957 134,783.35 (134,783.35)

Year 2 110,000 x 0.75614 ( 83,175.40) 83,175.40


Net difference 51,607.95 ( 51,607.95)

Difference in investment ( 50,000.00) 50,000.00

NPV 1,607.95 ( 1,607.95)

At 15 percent discount rate, Machine 1 is more acceptable.

8% Discount Rate

Machine 1 Machine 2

PV of Difference in ATCF

Year 1 155,000 x 0.92593 143,519.15 (143,519.15)

Year 2 110,000 x 0.85734 ( 94,307.40) 94,307.40

Net difference 49,211.75 ( 49,211.75)

Difference in investment ( 50,000.00) 50,000.00

NPV ( 788.25) 788.25

At 8 percent discount rate, Machine 2 is more acceptable.

. Answer: C

Cost of Investment:

Invoice price 950,000

Installation cost 24,200

Freight charge 800

Total investment 975,000

Annual Cash Flow:

Number of procedures: (52 x 5) 260

Contribution margin per procedures: (P800 P10 P40) P750

Total annual cash flow: (260 x P750) P195,000

Cash payback period: (975,000 195,000) 5 years

. Answer: B

Present value of cash flow (195,000 x 6.418) P1,251,510

Present value of salvage value (55,000 x 0.42241) 23,233

Total P1,274,743

Capital investment 975,000


Net present value P 299,743

. Answer: A

Average investment: (975,000 + 55,000) 2 515,000

Annual depreciation: (975,000 55,000) 10 92,000

Annual net income: 195,000 92,000 103,000

Average annual Rate of Return: P103,000 P515,000 20%

. Answer: A

Contribution margin: 300,000 x (75 50) 7,500,000

Less Fixed costs 4,500,000

Cash flow before tax 3,000,000

Less: Depreciation (6,000,000 4) 1,500,000

Income before tax 1,500,000

Less: Income tax (1,500,000 x 0.4) 600,000

Net income 900,000

Add back: Depreciation 1,500,000

After-tax Cash Flow 2,400,000

. Answer: C

PV of After-tax Cash Flows (2,400,000 x 2.9287) 7,028,900

Cost of investment 6,000,000

Net Present Value 1,028,900

. Answer: A

Annual excess present value (1,028,000 2.9287) P351,000


Excess cash before tax (351,000 0.6) P585,000

Maximum number of units as decrease (585,000 15) 39,000

. Answer: A

Average Annual net income:

(100,000 + 40,000 + 20,000 + 10,000 + 10,000) 5 = 36,000

Divide by average investment (400,000 2) 200,000

Accounting rate of return 18%

Accounting rate of return or unadjusted rate of return computes the profitability of the project in term of
accrual profit. Net profit under accrual method considers depreciation, a substantial amount that understates
the average profit. This understatement of amount that is used in the computation necessarily requires that
preferably, average investment should be used, instead of the initial investment, in the determination of
accounting rate of return.

. Answer: B
Cash Flow PV Factor PV of annual net cash flows:
180,000 0.909 163,620
120,000 0.826 99,120
100,000 0.751 75,100
90,000 0.683 61,470
90,000 0.621 55,890
Total 455,200
Amount of investment 400,000
Net Present Value 55,200

. Answer: C

Present Value Index (Profitability Index)

Present Value of ATCF Net Investment (455,200 400,000) = 1.14

The present value index computes net present value in terms of P1 investment. Therefore, the index of 1.14
means the net present value per P1 of investment is P0.14. This concept makes the present value index better
than the net present value technique because the index indicates which one is the most profitable on a per P1
investment.

. Answer: D

Cash Inflow Unrecovered Investment


Period 0 Outflows (400,000)
Period 1 180,000 (220,000)
Period 2 120,000 (100,000)
Period 3 100,000 Zero

The total outflows are fully recovered by the end of period 3.

The analyst should be careful in computing the payback period when the project has uneven cash inflows. The
common error in handling uneven cash flows is using the average cash flows instead of reducing the
unrecovered outflows.

. Answer: D

Payback period: Investment Net Annual Cash Inflow

P200,000 P50,000 = 4 years

. Answer: D

Present value of Net Cash Inflow (71,000 X 4.355) 309,205

Investment 300,000

Net Present value 9.205

. Answer: B

Average Investment: (200,000 2) = 100,000

Accounting Rate of Return = Net Income Average Investment

(10,000 100,000) = 10 percent

. Answer: B

The payback for PA is 4.225. This is closest to the present value of annuity of 1 discounted at 11 percent for 6
periods which is 4.231.
. Answer: A

Annual depreciation: (P50,000 8) P6,250

Annual tax shield: (P6,250 x 0.3) P1,875

. Answer: C

Before-tax cash inflow P10,000

Less depreciation 6,250

Income before tax 3,750

Less income tax (3,750 x 0.3) 1,125

Net income 2,625

Add back depreciation 6,250

After-tax cash inflow P 8,875

A quicker calculation of after tax cash flow can be made by adding the tax shield to after-tax cash inflow
without any tax benefit on depreciation.

(P10,000 .70) + P1,875 = P8,875

. Answer: B

Payback period: (P50,000 P8,875) = 5.6 years

. Answer: C

Present value of annual ATCF (P8,875 x 5.747) P51,000

Present value of after-tax salvage value (P1,400 x 0.54) 756

Total 51,756

Investment 50,000

Net present value P 1,756

. Answer: C

At the discount rate of 8 percent, there is a net present value of P1,756. Therefore, the IRR is higher than 8
percent.

Using trial and error approach, the first try should use 9 percent. If the present value of the inflows exceeds
P50,000, then the IRR is lower than 9 percent, otherwise it should be 9.5 percent.

Using 9.0 percent in discounting the inflows, there is a net present value of P(174); therefore the IRR is slightly
lower than but very close to 9.0 percent.

(P8,875 x 5.535) + (P1,400 x 0.5019) P50,000 = P(174)

. Answer: B

Additional contribution margin:

Small 6,000 x 5.40 32,400

Medium 15,000 x 6.50 97,500

Large 9,000 x 7.90 71,100


Total 201,000

Less Cash Fixed Expenses:

Rent 18,000

Salaries 54,000

Utilities 13,200

Insurance, etc. 7,800 93,000

Annual Cash Inflows 108,000

. Answer: B

Additional rental income 130,000

Additional cash flow, snack bar 15,000

Total 145,000

Less Cash Fixed Expenses:

Rent 48,000

Salaries 17,000

Utilities 5,400

Insurance, etc. 9,600 80,000

Annual Cash Inflow 65,000

. Answer: A

PV of annual cash inflow (108,000 x 5.575) 602,100


PV of salvage value (70,000 x 0.108) 3,240
PV of working capital return (7,500 x 0.108) 810
Total 606,150
Investment:
Remodeling cost 550,000
Working capital 7,500 557,500
Net Present Value 48,650

. Answer: B

PV of annual cash inflow (65,000 x 5.575) 362,375


PV of salvage value 1,296
PV of working capital return 432
Total 364,103
Investment:
Remodeling cost 290,000
Working capital 4,000 294,000
Net Present Value 70,103

. Answer: A

Rental income 21,000 x 5 105,000

Additional cash inflow, snack bar 13,000

Total 118,000

Less fixed expenses 80,000

Annual cash inflow 38,000


PV of annual cash inflow (38,000 x 5,575) 211,850

PV of salvage value 1,296

PV of working capital return 432

Total 213,578

Investment 294,000

Negative Net Present Value ( 80,422)

. Answer: D

The annual cost of advertising can be easily calculated by dividing the net present value of alternative 2, at
16% by the present value of annuity of 1.

70,103 5,575 = 12,574.53

. Answer: A

Annual revenues 300,000

Variable expenses 60,000

Contribution margin 240,000

Fixed expenses

Advertising 40,000

Salaries 110,000

Utilities 5,200

Insurance 800 156,000

Annual cash income 84,000

Less Depreciation 420,000 x 0.90 12 31,500

Annual Income 52,500

. Answer: A

Current operating costs old machine 78,000

Deduct Operating costs Machine B

Annual salary of operator 16,350

Annual maintenance cost 5,400 21,750

Annual cash savings 56,250

. Answer: A

Simple Rate of Return = Net Income Initial Investment


52,500 420,000 = 12.50 %

. Answer: B

Savings 56,250
Less Depreciation 234000 13 years 18,000
Annual income 38,250
Simple Annual Return 38,250 225,000 17 %
. Answer: C

Payback period = Initial Investment Annual Cash Inflow


420,000 84,000 = 5 years

. Answer: A

225,000 56,250 = 4 years

. Answer: C

Purchase price of new tools 2,500,000

Add increase in working capital 60,000

Total 2,560,000

Deduct Salvage value of the old tools 45,000

Net investment 2,528,500

. Answer: C

Purchase price of valve stem 80,000 x 20 1,600,000

Cost to make:

Direct materials 80,000 x 4.50 360,000

Direct labor 80,000 x 3.90 312,000

Variable overhead 80,000 x 1.50 120,000

Decrease in directs labor and variable costs 80,000 x 1.60 (128,000) 664,000

Cost savings 936,000

. Answer: A

PV of annual depreciation

Period Depreciation PV Factor Present Value


Year 1 832,500 0.89286 743,305.95
2 112,500 0.79719 886,873.88
3 370,000 0.71178 263,358.60
4 185,000 0.63552 117,571.20
Total 2,011,109.63
Tax rate 0.30
PV of tax benefits from depreciation 603,332.89

. Answer: C

After tax salvage value 100,000 x .7 70,000

PV of 1 end of 4 periods 0.63552

PV of after tax salvage value 44,486.4

. Answer: C

PV of after cash savings 936,000 x .7 x 3.03735 1990072

PV of tax benefits from depreciation 603,333

PV of after tax salvage value 44,486


PV of working capital return 60,000 x 0.63552 38,131

Investment (2528,500)
Net present value 147,522

. Answer: A

PV of tax benefits, declining - balance 603,333

PV of tax benefits, straight-line method 2,500,000 4 x .3 x 3.03735 569,503

Net advantage 33,830

. Answer: A

Invoice price of new equipment (945,000 x 0.98) P926,100

Freight 11,000

Installation cost 22,900

Total 960,000

Less: Salvage value of old equipment (0.6 x 1,500) 900

Reduction in working capital 2,500 3,400

Net initial outflows P956,600

. Answer: B

Total variable costs (262,000 units x P20*) P5,240,000

Avoidable fixed costs (P45,000 x 5 years) 225,000

Total 5,465,000

After-tax Cash outflows

Operating expenses (5,465,000 x 0.6) P3,279,000

Depreciation (960,000 x 0.4) ( 384,000)

After-tax salvage value of new equipment (12,000 x 0.60) ( 7,200)

Net outflows P2,887,800

*Variable cost per unit

Direct material (10.00 x 0.75) P 7.50

Direct labor 8.00

Variable overhead (6.00 x 0.75) 4.50

Total P20.00

. Answer: A

The present value of the tax shield based on declining-depreciation is:

Year Depreciation Tax Shield (40%) PV Factor PV of Tax Shield


2007 P319,968 P127,987 0.893 P114,292

2008 426,720 170,688 0.797 136,038

2009 142,176 56,870 0.712 40,492

2010 71,136 28,455 0.636 18,098

Total P308,920

. Answer: C

Purchase Cost

Year ATCF

2007 50,000 x 27 x 0.6 810,000

2008 50,000 x 27 x 0.6 810,000

2009 52,000 x 27 x 0.6 842,400

2010 55,000 x 27 x 0.6 891,000

2011 55,000 x 27 x 0.6 891,000

2006 (1,500 x 0.6) ( 900)

Total 4,243,500

. Answer: A

Present value of after-tax cash flows

2007 (810,000 x 0.893) P 723,330

2008 (810,000 x 0.797) 645,570

2009 (842,400 x 0.712( 599,789

2010 (891,000 x 0.636) 566,676

2011 (891,000 x 0.567) 505,197

Salvage value of old equipment (1,500 x 0.60) (900)

Net present value P3,039,662

. Answer: D

CFBT CFAT PV Factor PVCFAT


2006 Initial outflow (P956,600)
2007 (50,000 x 20) + 45,000 1,045,00
(1,045,000 x 0.6) - (319,968 x 0.4) 0 499,013 0.893 445,619
2008 (1,045,000 x 0.6) (426,720 x 0.4) 456,312 0.797 363,681
2009 (52,000 x 20) + 45,000 1,085,00
(1,085,000 x 0.6) (142,176 x 0.4) 0 594.130 0.712 423,021

2010 (55,000 x 20) + 45,000 1,145,00


(1,145,000 x 0.6) (71,136) 0 658,546 0.636 418,835
2011 (55,000 x 20) + 45,000 1,145,00
(1,145,000 x 0.6) 0 687,000 0.567 385,447
Salvage value (12,000 x 0.6) 7,200
P2,993,203