ANSWERS

02_CAPITAL BUDGETING QUIZZER 1

1B no tax rate
PV of inflows
ACI 220,000 x 3.791 834,020
less PV of outflows
Invesment 700,000
NPV 134,020

2A PV of inflows
ACI 30,000 x 70% 21,000
Depreciation tax shield
118,700 11,870 x 30% 3,561
24,561 x 4.833
PV of outflows
Investment
NPV

* simply substitute the cell (yellow) with the choices given; the choice which yields 0 NPV is the corre
Choice A has the lowest amount, thus, this is the maximum amount the company can pay and still m

try choice B
PV of inflows
ACI 30,000 x 70% 21,000
Depreciation tax shield
210,000 21,000 x 30% 6,300
27,300 x 4.833
PV of outflows
Investment
NPV

try choice C
PV of inflows
ACI 30,000 x 70% 21,000
Depreciation tax shield
187,500 18,750 x 30% 5,625
26,625 x 4.833
PV of outflows
Investment
NPV

try choice D
PV of inflows
ACI 30,000 x 70% 21,000
Depreciation tax shield
144,990 14,499 x 30% 4,350
 25,350 x 4.833
PV of outflows
Investment
NPV

3A Purchase price of the old vehicle is a SUNK COST; therefore, not considered in decision making.

Cumulative
4C Year Cash flows Cash flows Payback period
1 220,000 220,000 1
2 260,000 480,000 1
3 280,000 760,000 0.4 120,000 divide by 280,000
4 190,000 950,000
5 170,000 1,120,000
2.4 years

5A

6A Cumulative
Year Cash flows Cash flows Payback period
1 150,000 150,000 1
2 175,000 325,000 1
3 125,000 450,000 1
4 100,000 550,000 0.50 50,000 divide by 100,000
5 100,000 650,000
6 100,000 750,000
7 100,000 850,000
8 100,000 950,000
3.5 years

7C 500,000 = 3.85 years

130,000

8A

9D

10 D Cost of investment 160,000 + 30,000 190,000

Working capital required 35,000
Net cash outflow 225,000

11 A 190,000 = 38,000 x 40 % 15,200 x 3.791

5

12 C Working capital released 35,000 x 0.621 21,735

Working capital required 35,000
Impact or effect on NPV (13,265)
13 C

14 B Cash inflows in the 10th year

11,000 x 60% 6,600
SV in the 10th year
9,000 x 60% 5,400
Working capital released 12,000
24,000

15 D

16 C

17 D

18 B

19 C

20 D

21 C

22 C Among the 4 project proposals, only Project 1 is rejected : NPV is negative, IRR is below 12%
hurdle rate, and profitability index is below 100%.

23 D Since the 3 acceptable projects have different amounts of initial capital outlay, and there is
funds constraint, choose 2 projects with the highest prof index.

24 D Choose the one with the highest prof index

25 D

26 C

27 C

28 D

29 C PV of inflows
ACI 50,000 x 60% 30,000
Depreciation tax shield
100,000 20,000 x 40% 8,000
38,000 x 3.605
PV of outflows
Investment
 NPV

30 C PV of inflows
1 160,000 x 0.87 = 139,200
2 140,000 x 0.756 = 105,840
3 100,000 x 0.658 = 65,800
4 100,000 x 0.572 = 57,200
5 100,000 x 0.497 = 49,700 417,740
PV of outflows
Investment 400,000
NPV 17,740
18,600
No depreciation tax shield since no tax rate is given.

31 D

32 C

33 C PV of inflows PV factor period 5

7,400,000 x 0.437 = 3,233,800
PV of outflow
Investment 3,500,000
NPV (266,200) nearest to C

34 D
PV of inflows IRR factor
9,950,000 x 0.402 = 4,000,000
PV of outflows 4,000,000
NPV -

Locate in the PVA table

18% 20% ---> IRR
5 periods 0.437 0.402 0.402
 118,703

118,700
3 or close to 0

h yields 0 NPV is the correct answer.

mpany can pay and still meet the IRR criterion.

131,941

210,000 incorrect
(78,059)

128,679

187,500 incorrect
(58,821)
 122,515

144,990 incorrect
(22,475)

d in decision making.

57,623
, IRR is below 12%

tlay, and there is

136,990

100,000
 36,990

nearest to C
if PV factors used are rounded off to
2 decimal places

earest to C