Operating cash inflow

1. The Lakers Company is interested in buying a piece of equipment that is needs. The following
data assembled concerning this equipment:

Cost of required equipment P250,000

Working capital required P100,000

Annual operating cash inflow 80,000

Cash repair at end of 4 years 40,000

Salvage value at end of 6 years 90,000

This equipment is expected to have a useful life of 6 years. At the end of the sixth year the
working capital is 10%. Use the net present value method to answer the following question.

The PV of all future operating cash inflow is

a. P617,280
b. P45,120
c. P348,400
d. P278,710

Answer: C.

Annual Operating Cash Inflow P 80,000

X Present Value of 1 in 6 periods 4,355

Present Value of Operating Cash Inflow P348,400

2. The Jackson Company has invested in a machine that cost P70,00, that has a useful life of seven
years, and that has no salvage value at the end of its useful life. The machine is being
depreciated by the straight-line method, based on its useful life. It will have payback period of
four years. Given these data, the simple rate of return (to the nearest tenth of a percent) on the
machine will be (ignore taxes)
a. 7.1%
b. 8.2%
 c. 10.7%
d. 39.3%

Answer: C.

Investment Cost P70,000

Divided by Payback Period 4

Annual Cash Inflow 17,500

Less: Depreciation (P70,000/ 7yrs.) 10,000

Income 7,500

Divided by Investment 70,000

Simple Rate of Returns 10.7%

3. A project required an initial investment of P70,000 and has a profitability index of 1.141. the
present value of the future cash inflow from this investment is
a. P61,350
b. P68,920
c. P75,210
d. P79,870

Answer: D

Present Value of Investment P70,00

X Profitability Index 1.141

Present Value of Future Cash Inflow P79,870

4. Consideration is being given to the possible purchase of a P30,000 machine for Alo, which is
expected to result in a decrease of P12,000 per year in cash operating expenses. This machine,
which has no residual value, has an estimated useful life of five years and will be depreciated on
a straight-line basis. (ignore income taxes)
a. 12%
b. 20%
c. 30%
d. 40%

Answer: B

Annual Savings P12,000

Less: Depreciation (P30,000/5) 6,000

Increment Income 6,000

Divided by Investment 30,000

Simple Rate of Return 20%

5. 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 terminal disposal price. The machine will
generate cash flow from operations of P120,000 a year. Ignoring income taxes, what is the
accounting rate of returns on the net investment ?

a. 5% b. 10%

c. 12% d. 15%

Answer: C

Annual Cash Flow P120,000

Less: Depreciation (P600,000/10) 60,000

Accounting Net Income 60,000

Divided by Investment 600,000

Accounting Rate of Return 10%

6. The Yates Company purchased a piece of equipment which is expected to have a useful life of 7
years with no salvage value at the end of the 7-year period. This equipment is expected to
generate a cash inflow of P32,000 each year of its useful life. If this investment has a time-
adjusted rate of return of 14%, then the initial cost of the equipment is
a. P150,000
b. P137,216
c. P12,800
d. P343,360

Answer: B

Annual Cash Inflow P32,000

Present Value of an Annuity of 1 in 7 periods 4.288

Initial cost of the Equipment (PV of ACI) P137,216

 7. A firm must choose between leasing a new asset or purchasing it with funds from a term loan.
Under the purchase option, the firm will pay five equal principal payments of P1,000 each and
6% interest on the unpaid balance. Principal and interest are due at the each year for five years.
Alternatively, the firm can lease the asset for five years at an annual rental cost of P1,400 with
payments due at the beginning of each year. The corporate tax rate is 35% and the appropriate
after-tax cost of capital is 12%.

Which of the following is closest to the present value of the after-tax cost of leasing the new
asset?

a. P3,674
b. P3,779
c. P3,849
d. 3,992

Answer: A

[P1,400 X 0.65 + (P1,400 X 0.65) (3.037)] = P3,674

8. Duke University has a small shuttle bus that is in poor mechanical condition. The bus can be
either overhaul now or replaced with a new shuttle bus. The following data have been gathered
concerning this two alternatives:
Present Bus New Bus

Purchased cost new P32,000 P40,000

Remaining book value 21,000

Major repair needed now 9,000

Annual cash operating costs 12,000 8,000

Salvage value now 10,000

Salvage value seven years from now 2,000 5,000

The university could ‘continue to use the present bus for the next seven years. If the new bus is
purchased, it will be used for the next 7 years and then traded in for another bus. The university uses a
discount rate of 12% and the total cost approach to net present value analysis in evaluating its
investment decisions.

If the new bus is purchased, the present value of all cash flows that occur now is

a. (P4,000)
b. (P9,000)
c. (P21,000)
 d. (P30,000)

Answer: D

Purchase cost (New Bus) P40,000

Salvage Value (Present Bus) 10,000

Present Value All Cash Flows Occurring Now P30,000

9. The Ralph Company is considering buying a new machine which will require a initial outlay of
P15,000. The company estimated that over the next four years the 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 cost of capital is 14%. The net present value of this investment is
a. (P12632)
b. P17,484
c. P2,484
d. P3,612
Answer: C
Present value of cash inflow (P6,000 x 2.914) P17,484
Less: Net Investment 15,000
Net Present Value of Investment P 2,484

10. The president of Trial Company is considering a proposal by the factory manager for the
purchase of a machine for P44,000, the useful life would be eight years with no residual scrap
value. The use of the machine will produce a positive annual cash flow of P10,000 a year for
eight years. An annuity table shows the present value of P1 received annually for eight years and
discounted at 12% is 4.968. the net present value of the proposal, discounted at 12% is:
a. P5,680 positive
b. Zero
c. P2,186 negative
d. P2,186 positive

Answer: A

Present Value of Cash Inflows (P10,000 x 4.968) P49,680

Less: Cost of Investment 44,000

Net Present Value P 5,680

Net Initial Investment

1. Diliman Republic Publishers, Inc. is considering replacing an old press that cost P800,000 six
years ago with a new one that would cost P2,250,000. Shipping and installation would cost an
additional P200,000. The old press has a book value of P150,000 and could be sold currently for
P50,000. The increased production of the new press would increase inventories by P40,000,
accounts receivable by P160,000 and accounts payable by P140,000. Diliman Republic’s net
investment for analyzing the acquisition of the new press assuming a 35% income tax rate would
be
a. P2,450,000
b. P2,425,000
c. P2,600,000
d. P2,250,000

Answer: B

Purchase Price P2,250,000

Add: Shipping Cost 200,000

Total Cost 2,450,000

Add: Tax Savings 35,000

2,485,000

Less: Increase in Working Capital 60,000

Net Initial Investment P2,425,000

2. Verb, Inc., is considering a project that would have a ten-year life and would require a
P1,000,000 investment in equipment would have no salvage value. The project would provide
net income each year as follows:

Sales………………………………………………………………………. P2,000,000

Less: variable expenses…………………………………………. 1,400,000

Contribution margin……………………………………………….. 600,000

Less fixed expenses………………………………………………… 400,000

Net income…………………………………………………………….. P200,000

All of the above items, except for depreciation of P100,000 a year, represent cash flows. The
depreciation is included in the fixed expenses. The company’s required rate of return is 12%.

What is the project’s net present value?

 a. P650,000
b. P695,000
c. P1,300,000
d. P700,000

Answer: B

Net income
Depreciation
Net annual cash flow

Years Amount 12% factor present value

Initial investment now P(1,000,000) 1,000 P(1,000,000)

net annual cash flows 1-10 300,000 5,650 1,695,000
net present value P 695,000

3. Chum Company’s required rate of return is 14%. The company has an opportunity to be the
exclusive distribution of a very popular consumer item. No new equipment would be needed,
but the company would have to use one-fourth of the in a warehouse it owns. The warehouse
cost P200,000 new. The warehouse is currently half-empty and there are no other plans to use
the empty space. In addition, the company would have the distributorship for only 5 years. The
distributorship would generate a P17,000 net annual cash inflow. Ignore income taxes.
The net present value of the project at a discount rate of 14% is
a. P12,111
b. P143,077
c. P210,261
d. P10,261

Answer: D

Year Amount 14% Factor Present Value

Working Capital Investment now P(100,000) 1.000 P(100,000)
Annual cash flows 1-5 17,000 3.433 58,361
Working capital released 5 100,000 0.519 51,900
Net Present value P10,261

4. Andres Company is considering the purchase of a machine that promises to reduce operating
cost by the same amount for every year of its 6-year useful life. The machine will cost P83,150
and has no salvage value. The machine has a 20% internal rate of return. Ignore income taxes.
The annual cost saving promised by the machine is
a. P25,000
b. P50,000
 c. P35,000
d. P20,000

Answer: A

Investment required / Net annual cash inflow = Factor of the internal rate of return

P83,150/net annual cash inflow = 3.326

P83,150 / 3.326 = net annual cash inflow

= P25,000

5. Information about a company Sweetie Company is considering follows:

Investment P300,000
Revenue P190,000
Variable costs P50,000
Fixed out-of-pocket costs P25,000
Weighted average cost of capital 8%
Tax rate 40%

The property is considered 5-year property for tax purposes. The company plans to dispose of
the property at the end of the third year. Salvage value at the time is expected to be P60,000. Assume all
cash flows occur at the end of the year (round to the nearest pesos). Sweetie’s after-tax cash inflow
from disposal is

a. P82,080
b. P84,000
c. P86,250
d. P93,060

Answer: A

Salvage value
Book value
(P300,000-P60,000-P96,000-P28,800*)
Loss

*Depreciation for one-half year is taken in the year of disposal

Tax savings = P55,200 x 40% = P22,080

Net cash flow at disposal = P60,000 + P22,080 = P82,080

6. Evergreen has an investment opportunity costing P300,000 that is expected to yield the
following cash flows over the next six years:
 Year One P570,00
Year Two P90,000
Year Three P115,000
Year Four P130,000
Year Five P100,000
Year Six P90,000

The net present value of the investment at a cutoff rate of 10% is

a. P130,000
b. P62,100
c. P88,750
d. P50,766

Answer: A

Cash Factor PV

1 75,000 0.909 68,175

2 90,000 0.826 74,340
3 115,000 0.751 86,365
4 130,000 0.683 88,365
5 100,000 0.621 62,100
6 90,000 0.564 50,760

430,530
Investment 300,000
NPV 130,530

7. Crashdown Co. has the opportunity to introduce a new product. Crashdown expects the project
to sell for P40 and to have per-unit variable costs of P25 and annual cash fixed costs of
P2,500,000. Expected annual sales volume is 250,000 units. The equipment needed to bring out
the new product costs P3,500,000, has a four-year life and no salvage value, and would be
depreciated on a straight-line basis. Crashdown’s cutoff rates is 12% and its income tax rate is
40%. What is the increase in annual after-tax cash flows for this opportunity?
a. P900,000
b. P1,100,000
c. P875,000
d. P1,000,000

Answer: B

Income before taxes [P250,000 x (P40 – P25)

- P2,500,000 – P3,500,000 /4] P375,000
Income tax (150,000)
Net income P225,000
Depreciation 875,000
Net Cash flow P1,100,000

8. Consideration is being given to the possible purchase of a P20,000 machine for Maxi Company,
which is expected to result in a decrease of P10,000 per year in cash operating expenses. This
machine, which has no residual value, has an estimated useful life of five years and will be
depreciated on a straight-line basis. (ignore income taxes)
a. 1.67 years
b. 2.00 years
c. 4.17 years
d. 5,00 years

Answer: B

Investment P30,000
Divided by Annual Cash Returns 12,000
Payback Period 2.00 yrs.

9. Rano Co. has the opportunity to invest in a two-year project which is expected to produced cash
flows from operation, net of income taxes, of P100,000 in the first year and P200,000 in the
second year. Rano has a cost of capital of 20%. For this project, Rano should be willing to invest
immediately a maximum of
a. P283,300
b. P249,900
c. P222,100
d. P208,200

Answer: C

P100,000 x 0.833 =P 833,000

P100,000 x 0.694 =P 138,800
P222,100

10. Verb, Inc., is considering a project that would have a ten-year life and would require a
P1,000,000 investment in equipment would have no salvage value. The project would provide
net income each year as follows:

Sales………………………………………………………………………. P2,000,000

Less: variable expenses…………………………………………. 1,400,000

Contribution margin……………………………………………….. 600,000

Less fixed expenses………………………………………………… 400,000

Net income…………………………………………………………….. P200,000

All of the above items, except for depreciation of P100,000 a year, represent cash flows. The
depreciation is included in the fixed expenses. What is the project’s internal rate of return? (Interpolate
to the nearest tenth of a percent.)

a. 25.5%
b. 23.78%
c. 27.3%
d. 12.5%

Answer: C

P1,000,000 / P300,000 = 3.333

26% factor 3.465 3.465

true factor 3.333
28% factor 3.269

0.132 0.196

26% + 2% (0.312 / 0.916) = 27.3%