Professional Documents
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Operating Cash Inflow
Operating Cash Inflow
Operating Cash Inflow
1. The Lakers Company is interested in buying a piece of equipment that is needs. The following
data assembled concerning this equipment:
This equipment is expected to have a useful life of 6 years. At the end of the sixth year the
working capital is 10%. Use the net present value method to answer the following question.
a. P617,280
b. P45,120
c. P348,400
d. P278,710
Answer: C.
2. The Jackson Company has invested in a machine that cost P70,00, that has a useful life of seven
years, and that has no salvage value at the end of its useful life. The machine is being
depreciated by the straight-line method, based on its useful life. It will have payback period of
four years. Given these data, the simple rate of return (to the nearest tenth of a percent) on the
machine will be (ignore taxes)
a. 7.1%
b. 8.2%
c. 10.7%
d. 39.3%
Answer: C.
Income 7,500
3. A project required an initial investment of P70,000 and has a profitability index of 1.141. the
present value of the future cash inflow from this investment is
a. P61,350
b. P68,920
c. P75,210
d. P79,870
Answer: D
4. Consideration is being given to the possible purchase of a P30,000 machine for Alo, which is
expected to result in a decrease of P12,000 per year in cash operating expenses. This machine,
which has no residual value, has an estimated useful life of five years and will be depreciated on
a straight-line basis. (ignore income taxes)
a. 12%
b. 20%
c. 30%
d. 40%
Answer: B
5. The Habagat, inc. is planning to spend P600,000 for a machine that it will depreciate on a
straight line basis over a ten year period with no terminal disposal price. The machine will
generate cash flow from operations of P120,000 a year. Ignoring income taxes, what is the
accounting rate of returns on the net investment ?
a. 5% b. 10%
c. 12% d. 15%
Answer: C
6. The Yates Company purchased a piece of equipment which is expected to have a useful life of 7
years with no salvage value at the end of the 7-year period. This equipment is expected to
generate a cash inflow of P32,000 each year of its useful life. If this investment has a time-
adjusted rate of return of 14%, then the initial cost of the equipment is
a. P150,000
b. P137,216
c. P12,800
d. P343,360
Answer: B
Which of the following is closest to the present value of the after-tax cost of leasing the new
asset?
a. P3,674
b. P3,779
c. P3,849
d. 3,992
Answer: A
8. Duke University has a small shuttle bus that is in poor mechanical condition. The bus can be
either overhaul now or replaced with a new shuttle bus. The following data have been gathered
concerning this two alternatives:
Present Bus New Bus
The university could ‘continue to use the present bus for the next seven years. If the new bus is
purchased, it will be used for the next 7 years and then traded in for another bus. The university uses a
discount rate of 12% and the total cost approach to net present value analysis in evaluating its
investment decisions.
If the new bus is purchased, the present value of all cash flows that occur now is
a. (P4,000)
b. (P9,000)
c. (P21,000)
d. (P30,000)
Answer: D
9. The Ralph Company is considering buying a new machine which will require a initial outlay of
P15,000. The company estimated that over the next four years the machine would save P6,000
per year in cash operating expenses. At the end of four years, the machine would have no
salvage value. The company’s cost of capital is 14%. The net present value of this investment is
a. (P12632)
b. P17,484
c. P2,484
d. P3,612
Answer: C
Present value of cash inflow (P6,000 x 2.914) P17,484
Less: Net Investment 15,000
Net Present Value of Investment P 2,484
10. The president of Trial Company is considering a proposal by the factory manager for the
purchase of a machine for P44,000, the useful life would be eight years with no residual scrap
value. The use of the machine will produce a positive annual cash flow of P10,000 a year for
eight years. An annuity table shows the present value of P1 received annually for eight years and
discounted at 12% is 4.968. the net present value of the proposal, discounted at 12% is:
a. P5,680 positive
b. Zero
c. P2,186 negative
d. P2,186 positive
Answer: A
1. Diliman Republic Publishers, Inc. is considering replacing an old press that cost P800,000 six
years ago with a new one that would cost P2,250,000. Shipping and installation would cost an
additional P200,000. The old press has a book value of P150,000 and could be sold currently for
P50,000. The increased production of the new press would increase inventories by P40,000,
accounts receivable by P160,000 and accounts payable by P140,000. Diliman Republic’s net
investment for analyzing the acquisition of the new press assuming a 35% income tax rate would
be
a. P2,450,000
b. P2,425,000
c. P2,600,000
d. P2,250,000
Answer: B
2,485,000
2. Verb, Inc., is considering a project that would have a ten-year life and would require a
P1,000,000 investment in equipment would have no salvage value. The project would provide
net income each year as follows:
Sales………………………………………………………………………. P2,000,000
All of the above items, except for depreciation of P100,000 a year, represent cash flows. The
depreciation is included in the fixed expenses. The company’s required rate of return is 12%.
Answer: B
Net income
Depreciation
Net annual cash flow
3. Chum Company’s required rate of return is 14%. The company has an opportunity to be the
exclusive distribution of a very popular consumer item. No new equipment would be needed,
but the company would have to use one-fourth of the in a warehouse it owns. The warehouse
cost P200,000 new. The warehouse is currently half-empty and there are no other plans to use
the empty space. In addition, the company would have the distributorship for only 5 years. The
distributorship would generate a P17,000 net annual cash inflow. Ignore income taxes.
The net present value of the project at a discount rate of 14% is
a. P12,111
b. P143,077
c. P210,261
d. P10,261
Answer: D
4. Andres Company is considering the purchase of a machine that promises to reduce operating
cost by the same amount for every year of its 6-year useful life. The machine will cost P83,150
and has no salvage value. The machine has a 20% internal rate of return. Ignore income taxes.
The annual cost saving promised by the machine is
a. P25,000
b. P50,000
c. P35,000
d. P20,000
Answer: A
Investment required / Net annual cash inflow = Factor of the internal rate of return
= P25,000
Investment P300,000
Revenue P190,000
Variable costs P50,000
Fixed out-of-pocket costs P25,000
Weighted average cost of capital 8%
Tax rate 40%
The property is considered 5-year property for tax purposes. The company plans to dispose of
the property at the end of the third year. Salvage value at the time is expected to be P60,000. Assume all
cash flows occur at the end of the year (round to the nearest pesos). Sweetie’s after-tax cash inflow
from disposal is
a. P82,080
b. P84,000
c. P86,250
d. P93,060
Answer: A
Salvage value
Book value
(P300,000-P60,000-P96,000-P28,800*)
Loss
6. Evergreen has an investment opportunity costing P300,000 that is expected to yield the
following cash flows over the next six years:
Year One P570,00
Year Two P90,000
Year Three P115,000
Year Four P130,000
Year Five P100,000
Year Six P90,000
a. P130,000
b. P62,100
c. P88,750
d. P50,766
Answer: A
Cash Factor PV
430,530
Investment 300,000
NPV 130,530
7. Crashdown Co. has the opportunity to introduce a new product. Crashdown expects the project
to sell for P40 and to have per-unit variable costs of P25 and annual cash fixed costs of
P2,500,000. Expected annual sales volume is 250,000 units. The equipment needed to bring out
the new product costs P3,500,000, has a four-year life and no salvage value, and would be
depreciated on a straight-line basis. Crashdown’s cutoff rates is 12% and its income tax rate is
40%. What is the increase in annual after-tax cash flows for this opportunity?
a. P900,000
b. P1,100,000
c. P875,000
d. P1,000,000
Answer: B
8. Consideration is being given to the possible purchase of a P20,000 machine for Maxi Company,
which is expected to result in a decrease of P10,000 per year in cash operating expenses. This
machine, which has no residual value, has an estimated useful life of five years and will be
depreciated on a straight-line basis. (ignore income taxes)
a. 1.67 years
b. 2.00 years
c. 4.17 years
d. 5,00 years
Answer: B
Investment P30,000
Divided by Annual Cash Returns 12,000
Payback Period 2.00 yrs.
9. Rano Co. has the opportunity to invest in a two-year project which is expected to produced cash
flows from operation, net of income taxes, of P100,000 in the first year and P200,000 in the
second year. Rano has a cost of capital of 20%. For this project, Rano should be willing to invest
immediately a maximum of
a. P283,300
b. P249,900
c. P222,100
d. P208,200
Answer: C
10. Verb, Inc., is considering a project that would have a ten-year life and would require a
P1,000,000 investment in equipment would have no salvage value. The project would provide
net income each year as follows:
Sales………………………………………………………………………. P2,000,000
All of the above items, except for depreciation of P100,000 a year, represent cash flows. The
depreciation is included in the fixed expenses. What is the project’s internal rate of return? (Interpolate
to the nearest tenth of a percent.)
a. 25.5%
b. 23.78%
c. 27.3%
d. 12.5%
Answer: C
0.132 0.196