1. Which of the following is NOT relevant in calculating annual net cash flows for an investment?

a. Interest payments on funds borrowed to finance the project.

b. Depreciation on fixed assets purchased for the project.
c. The income tax rate.
d. Lost contribution margin if sales of the product invested in will reduce sales of other products.
2. Annual after-tax corporate net income can be converted to annual after-tax cash flow by
a. adding back the depreciation amount.
b. deducting the depreciation amount.
c. adding back the quantity (t x depreciation deduction), where t is the corporate tax rate.
d. deducting the quantity [(1- t) x depreciation deduction], where t is the corporate tax rate.
3. Money that a firm has already spent or committed to spend regardless of whether a project is taken is
called:
a. Sunk costs c. Fixed costs
b. Opportunity costs d. None of the above
4. An example of a sunk cost in a capital budgeting decision for new equipment is
a. increase in working capital required by a particular investment choice.
b. the book value of the old equipment.
c. the necessary transportation costs on the new equipment.
d. all of the above are examples of sunk costs.
5. Which of the following statements is most correct?
a. The rate of depreciation will often affect operating cash flows, even though depreciation is not a
cash expense.
b. Corporations should fully account for sunk costs when making investment decisions.
c. Corporations should fully account for opportunity costs when making investment decisions.
d. Statements a and c are correct.
6. All of the following are methods that aid management in analyzing the expected results of capital
budgeting decisions, except
a. Accrual accounting rate of return. c. Future value cash flow.
b. Payback period. d. Discounted cash flow rate of return.
7. Which one of the following capital investment evaluation methods does not take the time value of money
into consideration?
a. Net present value. c. Internal rate of return.
b. Discounted payback. d. Accounting rate of return.
8. The focus in capital budgeting should be on
a. the tax consequences of different investment strategies.
b. the internal rate of return of different strategies.
c. expected future cash flows that differ between alternatives.
d. none of the above.
9. In the analysis of a capital budgeting proposal, for which of the following items are there no after-tax
consequences?
a. Cash flow from operations
b. Gain or loss on the disposal of the asset
c. Reduction of working capital balances at the end of the useful life of the capital asset
d. There are no after-tax consequences of any of the above.
10. Which of the following rules are essential to successful cash flow estimates, and ultimately, to successful
capital budgeting?
a. The return on invested capital is the only relevant cash flow.
b. Only incremental cash flows are relevant to the accept/reject decision.
c. Total cash flows are relevant to capital budgeting analysis and the accept/reject decision.
d. Statements a and b are correct.
11. Capital budgeting emphasizes two factors
 a. qualitative and nonfinancial. c. quantitative and financial
b. quantitative and nonfinancial. d. qualitative and financial.
12. Net Working Capital should be considered in project cash flows because:
a. They are sunk costs
b. Firms must invest cash in short-term assets to produce finished goods
c. Firms need positive Net Present Value projects for investment
d. None of the above

Problem Solving:
Problem 1: Determine the Present Value of the following, given that the interest rate is 12%:
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Case A: Future value of cash -------------------------------------------------------------------------------------- P250,000
Case B: Future value of cash ------------- P10,000 P10,000 P10,000 P10,000 P10,000
Case C: Future value of cash P50,000 P50,000 P50,000 P50,000 P50,000
Case D: Future value of cash ------------- P25,000 P60,000 P30,000 P30,000 P30,000

Problem 2: On January 1, 2018, AyeBeeCee Corporation acquired an equipment for cash of P250,000, in
addition the corporation also incurred the following: Shipping – P5,000, Installation Cost – 25,000, Insurance
during the delivery – P10,000. The equipment is estimated to have a useful life of 5 years with a scrap value of
P40,000.
Prepare the Depreciation Table for the equipment assuming the depreciation method used is:
a) Sum of Years Digit [Date – Fraction – Depreciation – Accumulated Depreciation – Book Value]
b) Double Declining Balance [Date – Depreciation – Accumulated Depreciation – Book Value]
Problem 3: 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 Moore’s 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. Because of the expected increase in production, additional P3,000
cash will be invested to finance the additional production with a corresponding increase in current liabilities of
P1,500. The machine will be depreciated over a 10-year useful life using SYD. The Income tax rate is 30%.
Required: Determine the following cash flow 1) Initial, 2) at the end of the Third Year and 3) Terminal.

1) What is the net cash outflow at the beginning of the first year that Moore Corporation should use in a capital
budgeting analysis?
2) What is the net cash flow for the third year that Moore Corporation should use in a capital budgeting analysis?
3) What is the net cash flow for the tenth year of the project that Moore Corporation should use in a capital
budgeting analysis?