1. RPI Inc.

, a printing and publishing firm, is considering to invest in another offset printing

machine that will cost ₱1.8 million. The machine will have a useful life of 4 years. Its estimated
salvage value at the end of 4 years is equal to its net book value. Annual fixed running costs total
₱1,656,000, including straight line depreciation of ₱420,000.
The machine’s printing capacity is estimated at 36 million copies per annum for each of
the first two years and 30 million copies for each of the last 2 years of its life. The company can
sell all the copies that the new machine will print at an average contribution margin of ₱800 per
10,000 copies. The company is subject to a 32% tax rate.
What is the average accounting rate of return based on the initial investment in the new
machine?
a. 54.67% b. 37.17% c. 2.69% d. 69.7%

2. Vhong Corporation has determined that if a new equipment costing P120,000 is

purchased, the company’s net income will increase by P10,000 per year. If the new equipment
will be depreciated using the straight line method over a period of six years to a zero salvage
value, the payback period is
a. 6 years b. 12 years c. 0.25 years d. 4 years

3. Doris Wade purchased a condominium for $50,000 in 1987. Her down payment was
$20,000. She financed the remaining amount as a $30,000, 30-year mortgage at 7%,
compounded monthly. Her monthly payments are $200. It is now 2007 (20years later) and Doris
has sold the condominium for $100,000, immediately after making her 240th payment on the
unit. Her effective annual internal rate of return on this investment is closest to which answer
below?
a. 3.6% b. 8.5% c. 5.3% d. 1.5%

4. A public school is being renovated for $13.5million. The building has geothermal heating
and cooling, high-efficiency windows, and a solar array that permits the school to sell electricity
back to the local electric utility. The annual value of these benefits is estimated to be $2.7
million. In addition, the residual value of the school at the end of its 40-year life is negligible.
What is the simple payback period and internal rate of return for the renovated school.
a. 4 years; 24% b. 6 years; 30% c. 5 years; 20% d. 6 years; 69%

5. A new system will require an increase in working capital of P50,000 but it is expected to
generate additional sales of P100,000 per year. If the gross profit rate is 40% and incremental
fixed costs is P20,000, the payback period in years is
a. 20 years b. 2 years c. 2.5 years d. 0.5 years
6. In this problem, we consider replacing an existing electrical water heater with an array
of solar panels. The net installed investment cost of the panels is $1,400 ($2,000 less a 30% tax
credit from the government). Based on an energy audit, the existing water heater uses 200
kilowatt hours (kWh) of electricity per month, so at $0.12 per kWh, the cost of operating the
water heater is $24 per month. Assuming the solar panels can save the entire cost of heating
water with electricity, what is the simple payback period for the solar panels?
a. 54 months b. 48 months c. 58 months d. 56 months

7. A bond has a face value of P1,000, is redeemable in eight years, and pays interest of
P100 at the end of each of the eight years. If the bond can be purchased for P981, what is the
rate of return if the bond is held until maturity?
a. 10.65% b. 12.65% c. 10.35% d. 11.56%

8. A foundation was endowed with P15,000,000 in July 2010. In July 2014, P5,000,000 was
expended for facilities, and it was decided to provide P250,000 at the end of each year forever
to cover operating expenses. The first operating expense is in July 2015, and the first
replacement expense in July 2014. If all money earns interest at 5% after the time of
endowment, what amount would be available for the capital replacements at the end of every
fifth year forever?
a. P1,243,221 b. P1,147,790 c. P1,113,276 d. P1,179,543

9. A U.S. government bond matures in 10 years. Its quoted price is now 96.4, which means
the buyer will pay $96.40 per $100 of the bond’s face value. The bond pays 5% interest on its
face value each year. If $10,000 (the face value) worth of these bonds are purchased now, what
is the yield to the investor who holds the bonds for 10 years?
a. 5.29% b. 4.31% c. 10.35% d. 6.26%

10. Street lighting fixtures and their sodium vapor bulbs for a two-block area of a large city
need to be installed at a first cost (investment cost) of $120,000. Annual maintenance expenses
are expected to be $6,500 for the first 20 years and $8,500 for each year thereafter. The lighting
will be needed for an indefinitely long period of time. With an interest rate of 10% per year,
what is the capitalized cost of this project (choose the closest answer below)?
a. $178,313 b. $188,000 c. $202,045 d. $268,000

11. What is the equivalent AW of a two-year contract that pays $5,000 at the beginning of
the first month and increases by $500 for each month thereafter? ROR= 12% compounded
monthly
a. $10,616 b. $131,982 c. $5,235 d. $134,649
12. A corporation uses a type of motor truck which costs P7000 with life of 2 yrs. and final salvage
value of P900. How much could the corporation afford to pay for another type of truck of the
same purpose whose life is 3 years with a final salvage values of P1500. Money is worth 4%
a. P10408.6 b. P9866.7 c. P10104.5 d. P10397.9

13. A plasma arc furnace has an internal combustion temperature of 7,000◦C and is being
considered for the incineration of medical wastes at a local hospital. The initial investment is
$300,000 and annual revenues are expected to be $175,000 over the six-year life of the furnace.
Annual expenses will be $100,000 at the end of year one and will increase by $5,000 each year
thereafter. The resale value of the furnace after six years is $20,000.
a. 4 years b. 5 years c. 6 years d. 7 years

14. A patriotic group of firefighters is raising money to erect a permanent (i.e., infinite life)
monument in New York City to honor those killed in the line of duty. The initial cost of the
monument will be $150,000, and the annual maintenance will cost $5000. There will be an
additional one-time cost of $20,000 in 2 years to add names of those who were missed initially.
At an interest rate of 6% per year, how much money must they raise now in order to construct
and maintain the monument forever?
a. $251,133 b. $241,220 c. $200,129 d. $290,348

15. At an interest rate of 10% per year, the capitalized cost of P10,000 in year 0, P5000 per year in
years 1 through 5, and P1000 per year thereafter forever is closest to:
a. P29,652 b. P35,163 c. P38,954 d. P43,221

16. A sports mortgage is an innovative way to finance cash-strapped sports programs by allowing
fans to sign up to pay a “mortgage” for the right to buy good seats at football games for several
decades with season tickets locked in at current prices. At Notre Dame, the locked-in price
period is 50 years. If a fan pays a P130,000 “mortgage” fee now (i.e., in year 0) when season
tickets are selling for P290 each, what is the equivalent annual cost of the football tickets over
the 50-year period at an interest rate of 8% per year?
a. P20,754 b. P31,231 c. P10,926 d. P15,669

17. Eight years ago, Ohio Valley Trucking purchased a large-capacity dump truck for $115,000 to
provide short-haul earthmoving services. The company sold it today for $45,000. Operating and
maintenance costs averaged $10,500 per year. A complete overhaul at the end of year 4 cost an
extra $3600. Calculate the annual cost of the truck at 8% per year interest.
a. $26,741 b. $34,802 c. $17,867 d. $20,437
18. Estimates for one of two process upgrades are as follows: fi rst cost of $40,000, annual cost of
$5000 per year, market value that decreases by $2000 per year to the salvage value of $20,000
after the expected life of 10 years. If a 4-year study period is used for AW analysis at 15% per
year, the correct AW value is closest to:
a. $14,346 b. $12,602 c. $19,908 d. $20,437

19. The perpetual annual worth of investing P50,000 now and P20,000 per year starting in year 16
and continuing forever at 12% per year is closest to:
a. P4200 b. P8650 c. P9655 d. P10,655

20. A contract between BF Goodrich and the Steelworkers Union of America called for the company
to spend $100 million in capital investment to keep the facilities competitive. The contract also
required the company to provide buyout packages for 400 workers. If the average buyout
package is $100,000 and the company can reduce costs by $20 million per year, what rate of
return will the company make over a 10-year period? Assume all the company’s expenditures
occur at time 0 and the savings begin 1 year later.
a. 10.1% b. 9.09% c. 8.08% d. 7.07%

21. P&G sold its prescription drug business to Garter-Telto, Ltd. for P3.1 billion. If income from
product sales is P2 billion per year and net profit is 20% of sales, what rate of return will the
company make over a 10-year planning horizon?
a. 4.9% b. 5.8% c. 6.7% d. 7.5%

22. The Office of Naval Research sponsors a contest for college students to build underwater robots
that can perform a series of tasks without human intervention. The University of Florida, with its
SubjuGator robot, won the $7000 first prize (and serious bragging rights) over 21 other
universities. If the team spent $2000 for parts (at time 0) and the project took 2 years, what
annual rate of return did the team make?
a. 78.9% b. 86.5% c. 87.1% d. 83.4%

23. The winner of a state lottery will receive P5,000 per week for the rest of her life. If the winner’s
interest rate is 6.5%per year compounded weekly, what is the present worth of this jackpot?
a. P5M b. P4M c. P3M d. P2M

24. The maintenance and operation (M&O) cost of front-end loaders working under harsh
environmental conditions tends to increase by a constant $1200 per year for the first 5 years of
operation. For a loader that has a first cost of $39,000 and first-year M&O cost of $17,000,
compare the equivalent annual worth of a loader kept for 4 years with one kept for 5 years at an
 interest rate of 12% per year. The salvage value of a used loader is $23,000 after 4 years and
$18,000 after 5 years.
a. Keep the b. Keep the c. Equally d. None of these
loader for 4 loader for 5 economical
years years

25. Calculate the perpetual equivalent annual cost (years 1 through infinity) of $5 million in year 0,
$2 million in year 10, and $100,000 in years 11 through infinity. Use an interest rate of 10% per
year.
a. P817,432 per b. P723,425 per c. P615,650 per d. P552,654 per
year year year year

Key to Correction

1. B
2. D
3. D
4. C
5. C
6. C
7. C
8. B
9. A
10. B
11. D
12. A
13. B
14. A
15. B
16. C
17. A
18. B
19. C
20. D
21. A
22. C
23. B
24. A
25. C