Exercise 4

CAPITAL INVESTMENT DECISION

1.D
2.C 1. BASICS OF CAPITAL INVESTMENT
3.B a. Payback period= net investment/Accrual Cash return
4.B =300, 000/ 50,000
5.A = 6 years
6.C
7.D b. ARR= average accrual Net income/ total investment
8.B = (50,000-15,000)/300,000
9.B = 11.67%
10.A
11.D c. IRR
12.D 1. Investment= Accrual cash return x PV Factor
13.D =300, 000=50,000x
14.C 300,000/50,000=50,000x/50,000
15.C
6=x
16.D
2. 3.16%------------5.929
17.D
?------------------6
18.B
5.929-6= 0.071
19.A
20.A
21.C 14%---------------6.623
22.B 6.623-5.929=0.694
23.C
24.D IRR= 16%+ (0.071/ 0.694) X (-2%)
25.C = 16%+(1.102 X (-2%)
26.C = 16% + (0.002)
27.D = 16% - 0.002
28.B = 15.998%
29.D
30.A d. Basing on the ARR, Keira should buy the equipment because as shown in the ARR
31.D which is 11.67%-greater than the weighted average cost of capital of 10% which is
32.C also equal to the minimum or lowest acceptable rate of return.
33.C
34.D
35.D
36.B
37.B
38.B
39.D
40.B

2.
 A.
Year Annual cash inflow of Present net value of P1 Present Value
X-ray equipment at 12%
1 P375, 000 0.893 P 334,875
2 119, 500 0.797 119,550
3 525, 000 0.712 212,600
4 150,000 0.636 95, 400
5 75,000 0.567 42, 525
Total P 805,950
Less: Present value of (750,000.00)
net investment
Excess of net Present P55,950
Value

Year Annual cash inflow of Present net value of P1 Present Value

Biopsy equipment at 12%
1 P75, 000 0.893 P 66,975
2 75,000 0.797 59, 775
3 525, 000 0.712 373,800
4 600,000 0.636 381,600
5 675,000 0.567 382,725
Total 1,64,875
Less: Present value of (750,000.00)
net investment
Excess of net Present P514,875
Value

B. X-Ray equipment
Annual cash Return
Y1 -2= 525,000
Y3= 300,000
Y4= 150,000
Y5=75,000

Payback Period=2 years+[(750,000-525,000)/300,000] x 1 year

=2 years+ 0.75
= 2.75 years

Biopsy Equipment
Y 1-3= 675,000
Y4=600,000
Y5= 675,000

Payback period= 3 years+[(750,000-675,000)/600,000x 1 year]

= 3 years+ 0.125
= 3.125 years
In this case, the company should accept the x-ray equipment because the higher the payback period the higher
the risk. On the other hand, getting estimates using this method is essential if the managements want to have
return on investment in a short span of time.