Net Investments

#1 Market value 100,000

Tax on gain - 8,000 (100,000 - 80,000) x 40%
92,000

#2 Old Machine
Market value - 400,000
Replacement machine
Cost 550,000
150,000

#3 Old machine
Market value - 50,000
Tax on loss - 35,000 (150,000 - 50,000) x 35%
New machine
Cost 2,250,000
Shipping & installation 200,000
Working capital 60,000 (40,000 + 160,000 - 140,000)
2,425,000

#4 Old machine
Trade-in value - 60,000
Avoidable major repaid - 130,000 (200,000 x (1 - 35%)
New machine
Cost 800,000
610,000

#5 Old machine
Trade-in value - 7,500
Avoidable major repair - 2,400 4,000 x (100% - 40%)
Other assets
Salvage value - 3,000
Tax on loss - 400
New machine
Cost 50,000
Freigh & installation 1,500
Working capital 12,000
50,200

#6 Old equipment
 Salvage value - 10,000
New equipment 120,000
Net investment 110,000
*This is the best answer among the choices, but still wrong

Correct answer is:

Old equipment
Salvage value - 10,000
Tax on loss - 4,900 (70,000 - 56,000) x 35%
Net equipment 120,000
105,100

Operating Cash Flows After Tax

#7 Present Value After Tax 10,000
Divide by PV factor 0.65873
Cash Flow After Tax 15,181
After tax rate 65%
23,354.93

#8 Cash Flow
New machine cost - 90,000
Old machine disposal value 5,000
Operating cash flow 25,000 125,000-100,000
Life 5 125,000
40,000

End-of-Life Cash Flows

#9 Scrap value & total gain 20,000
Cost to remove - 30,000
Net tax benefit 3,500 (30,000 - 20,000) x 35%
Net outflow - 6,500

#10 Working capital 200,000

PV factor 0.385543
77,109

Accounting Rate of Return

# 11 Sales 90,000
Cost - 80,000
 Income 10,000
Investment 100,000
Accounting rate of return 10%

# 12 Cash Flows 12,000

Depreciation - 5,400 (30,000 - 3,000) / 5
Net income 6,600
Investment 30,000
Accounting rate of return 22%

Payback Period
#13 Payback period (years) 6
Annual cash inflow, first 3 years 13,500 4,500 x 3
Annual cash inflow, last 3 years 10,500 3,500 x 3
24,000

#14 Required payback (years) 3.75 (75% x 4 years)

Actual payback (years) 3.55
Decision: Accept

Bailout Payback
# 15 Cash Flow Salvage Value
Year 0 - 90,000
Year 1 36,000 20,000
Year 2 36,000 20,000
Year 3 36,000 15,000
Year 4 36,000 15,000
Year 5 36,000 10,000

Bailout payback = 1.94 (36,000 + 20,000 + 34,000/36,000)

Net Present Value

# 16 Profitability Index 1.30
PV of cash inflows 44,000
Initial Investment 33,846
NPV 10,154

#17 Net Investment

New machine - 950,000
 Old machine 50,000 - 900,000

Annual Cash Flows 350,000

PVA factor 2.91371 1,019,799
119,799

#18 Sales (12,000 x 12,000) 144,000,000

Variable cost (12,000 x 7,000) - 84,000,000
Contribution margin 60,000,000
Fixed costs - 25,000,000
Operating Cash Flow 35,000,000 0.64 22,400,000
Depreciation 16,000,000 0.36 5,760,000
Operating Cash Flow After Tax 28,160,000
PVA factor 3.604776
PV of Cash Inflows 101,510,498
Net investment - 80,000,000
Net Present Value 21,510,498

#19 Tax rate 40%

Year 0 Net investment 320,000
Resale value - 20,000
Depreciable value 300,000
Depreciation 30% 90,000
Depreciation 40% 120,000

CF bef tax Dep Salvage Value

Year 1 170,000 90,000
Year 2 170,000 120,000
Year 3 170,000 90,000 20,000

# 20
Quantity 27,000
Sales 800 21,600,000
Variable Cost 400 - 10,800,000
Fixed costs - 4,000,000
Operating cash flow 6,800,000 65%
Depreciation 2,500,000 35%
Operating cash flow after tax
PVA factor
 PV of cash inflow
Investment
Net present value

# 21 NPV 17,022
PV factor 0.56743
29,999

# 22 Gas Electric
Investment 1 55,000
Investment 2 55,000
PV factor 0.5337 29,351
84,351 90,000

Cash flow before tax 22,000 28,000

PV factor 4.207163 4.207163
PV of CF 92,558 117,801
Investment - 84,351 - 90,000
Net present value 8,207 27,801

# 23 Plan A Plan B
Life (years) 10
Risk profile Average High
Hurdle rate 11% 9%
Cost 10,000,000 5,000,000
operating cost 1,000,000 2,000,000
PVA factor 5.88923 6.41766
5,889,232 12,835,315
NPV 15,889,232 17,835,315
*If all cash flows are outflows, the higher the risk, the lower the discount rate

Fisher Rate
# 24
Year 0 - 50,000
Year 1 155,000
Year 2 - 110,000

Fisher rate (IRR of difference) 10.000%

Internal Rate of Return (IRR)

#25 Payback period 4.00
Payback period = PVA factor of IRR
IRR PVA factor
14.79% 4.19
15.61% 4.09
16.33% 4.00
18.54% 3.75

#26 Net Investment 500,000

Cash Flow After Tax 145,000
Payback period = PVA factor of IRR 3.4483
IRR PVA factor
2.04% 4.708
3.45% 4.521
13.80% 3.450
15.48% 3.314

#27 Net Investment 921,250

Annual cash flows 250,000
Life (years) 6
Payback period = PVA factor of IRR 3.6850
IRR PVA factor
15% 3.784
16% 3.685
17% 3.589
18% 3.498

#28 Net Investment 1,000,000

Annual cash flows 325,000
Life (years) 5
Payback period = PVA factor of IRR 3.0769
IRR PVA factor
18.72% 3.077

#29 Net Investment 50,000

Residual Value at Year 5 10,000 0.57
PVA @ 12% n= 5 3.60
PV @ 12%, n = 5 0.57

#30 Net Investment 42,825

Life (years) 4
IRR 15%
Tax rate 40%
 PVA @ 15%, n = 4 2.85498

Workback Solution
Before Tax After Tax
Cash Flow Before Tax 17,862.68 60% 10,718
Depreciation 10,706.25 40% 4,283
Cash Flow After Tax 15,000

#31 Net Investment 500,000

Life (years) 10
Cost of capital 12%
Tax rate 40%
PVA @ 12%, n = 10 5.65022
Cash Flow After Tax 88,492

Workback Solution Before Tax After Tax

Cash Flow Before Tax 114,153.47 60% 68,492
Depreciation 50,000.00 40% 20,000
Cash Flow After Tax 88,492

#32 Workback Solution Cash Flow PV Factor PV

Year 0 - 50,000
Year 1 18,000 0.893 16,074
Year 2 22,000 0.797 17,534
Year 3 23,022 0.712 16,392
-
#33 Life (years) 8
Annual cash flows 81,000
IRR 14% 81,000 4.639
Cost of capital 16% 86,501 4.344
5,501

#34 Net investment 400,000 Years Factor

Annual cash flows 75,000 5 3.993
PVA factor 5.33 6 4.623
Discount rate 8% 7 5.206
8 5.747

Project Screening - Independent Projects

#35
Period Project A Project B
- - 10,000 - 30,000
1 4,550 13,650
 2 4,150 12,450
3 3,750 11,250

IRR 12.24% 12.24%

Project Screening - Mutually Exclusive Projects

#36 Choose Project D, because it has highest NPV

Capital Rationing & Optimal Capital Budget

#37 Project Investment NPV
X 150,000 34,005
G 100,000 22,670
W 60,000 13,602
Always rank based on P.I.

#38 Criteria: Choose combination of projects within the P900,000 capital budget with the highest tota

#39 Criteria: Choose combination of projects within the P900,000 capital budget with the highest tota

#40 Capital MCC Project Amount

600,000 10.00% B 300,000
D 350,000
400,000 10.50%
E 400,000
11.00%
1,050,000
In capital rationing, prioritize projects with highest IRR

#41 Just memorize, haha

Comprehensive
#42 Cost - 200,000
Cash Flows 60,000 5.65 339,000
139,000

#43 Cash Flows 60,000

Depreciation - 20,000
Net income 40,000
 Cost 200,000
Accounting rate of return 20%

#44 Original estimate 5,000,000

Actual cost to date 3,750,000
Percent complete 65% 5,769,231
Cost Overrun 769,231

#45

#46 New car

cost 120,000
Old car
Salvage value 12,000
Tax on loss (15,000 - 12,000) x 25% 750 - 12,750
107,250

#47 Net investment 107,250

Cash flow after tax
before tax cash flows 20,000 75% 15,000
Depreciation 24,000 25% 6,000
21,000
Payback period 5.11

#48-55 Life = 4 years Period Net Investmen EBITDA

Tax rate = 25% 0 - 100,000
Discount rate = 10% 1 30,000
2 30,000
3 40,000
4 40,000

Payback 0 - 100,000
1 - 71,250 1
2 - 42,500 1
3 - 6,250 1
4 30,000 0.17
3.17

Accounting rate of return

Net income 7,500
15.00% #51
Ave. Investment 50,000
Profitability Index
PV of Cas inflow 101,864
1.02 #54
Investment 100,000
,000 - 80,000) x 40%

,000 - 50,000) x 35%

000 + 160,000 - 140,000)

,000 x (1 - 35%)

0 x (100% - 40%)
000 - 56,000) x 35%

000-100,000

000 - 20,000) x 35%

000 - 3,000) / 5

34,000/36,000)
CF after Tax PV of CF
138,000 0.862 118,956
150,000 0.743 111,450
158,000 0.641 101,278
446,000 331,684
- 320,000
NPV 11,684

8 years
14%
35%

4,420,000
875,000
5,295,000
4.63886
 24,562,784
20,000,000
4,562,784

scount rate
 50,000
- 5,700
44,300
3.60
12,306
(3)
(2)
(1)

(3)
(2)
(1)

375,759
375,759
 PI
1.23
1.23
1.23

tal budget with the highest total NPV

tal budget with the highest total NPV

IRR
14.00%
13.50%
12.00%
 Deprn EBT Tax EAT CFAT PV factor

- 25,000 5,000 - 1,250 3,750 28,750 #48 0.909

- 25,000 5,000 - 1,250 3,750 28,750 0.826
- 25,000 15,000 - 3,750 11,250 36,250 0.751
- 25,000 15,000 - 3,750 11,250 36,250 #49 0.683
AVERAGE 7,500

#50
 26,133.75
23,747.50 #52
27,223.75
24,758.75
101,863.75 #53