Maderazo, Dheine Louise L.

A2A
Quiz 2: Capital Investment Decisions

PROBLEM 1: Mediatrix Hospital Inc

Requirement 1: What is the payback period?
Invoice Price P950,000
Installation Price 24,200
Freight Charge 800
Total Investment P975,000

Number of Procedure (52 weeks x 5) 260

Contribution Margin per procedure
(P800- P10 – P40) P750
Total Annual Cash Flow P195,000

Payback Period = P975,000 / P195,000

= 5 years
Requirement 2:
Present value of Cash Flow P1,251.510
(P195,000 x 6.418)
Present value of Salvage Value
(P55,000 x 0.42241) 23,233
Total P1,274,743
Capital Investment (975,000)
Net Present Value P299,743

PROBLEM 2: Kabayan Company

Requirement 1:
Contribution Margin (300,000 x (75-50)) P7,500,000
Less: Fixed Cost 4,500,000
Cash Flow before Tax 3,000,000
Less: Depreciation (6,000,000 / 4) 1,500,000
Income before Tax 1,500,000
Less: Income Tax (1,500,000 x 0.4) 600,000
Net Income 900,000
Add back: Depreciation 1,500,000
After-Tax Cash Flow P2,400,000

Requirement 2:
 PV after-tax Cash Flow P7,028,900
(2,400,000 x 2.9287)
Cost of Investment (6,000,000)
Net Present Value P1,028,900

PROBLEM 3
The total analysis approach was used in computing the present value, and the comparison between the
choice to buy and the choice to retain is needed to answer this problem.
Retain Buy
PV of Annual cash outlay PV of Annual cash outlay
(300,000 x P0.38) + P21,000 P135,000 (300,000 x P0.29) + P11,000 P98,000
(135,000 x 3.6847) 497,435 (98,000 x 3.6847) 361,100
PV of Salvage Value PV of Salvage Value
(P7,000 x 0.41044) (2,873) (P20,000 x 0.41044) (8,209)
Total P494,562 Investment in New Machine 80,000
Total P432,891

Advantage of Alternative to “buy”: P494,562 – P432, 891 = P61,671

It would be better to buy a new machine because the choice to buy a new machine would require a lower
present value of total outflows, which, in fact, is a better investment proposal.

PROBLEM 4
Initial Investment = 4.968 x P20,000
= P99,360

PROBLEM 5
A net present value of zero (0) is needed in order for a project to be deemed acceptable and a negative net
present value must be offset by the annual intangible benefit’s present value.
PV of Intangible Benefits P184,350
PV of 1 @10% in 10 years ÷ 6.145
Annual net intangible benefits P30,000