Capital Budgeting

Gains or Losses on Disposal

• If it is sold for book value, there is no gain or loss

and so there is no tax effect.

• If it is sold for more than P50,000, there is a gain

and an additional tax payment.

• If it is sold for less than P50,000, there is a loss

and a tax savings.

Combination of Problems-1
Items 1 through 4 are based on the following:

Ram Co. is negotiating for the purchase of equipment

that would cost P100,000. Ram expects that P25,000
per year could be saved in after-tax cash costs if the
equipment were acquired. The equipment's estimated
useful life is 10 years, with no residual value, and
would be depreciated by the straight-line method.
Ram's minimum desired rate of return is 12%.
 Capital Budgeting

PV of an annuity of 1 at 12% for 10 periods: 5.65

PV of 1 due in 10 periods at 12%: .322

Combination of Problems-2

1. The net present value is

a. P 41,250 b. P 6,440
c. P12,200 d. P13,000

2. The payback period is

a. 4.0 years. b. 4.4 years.

c. 4.5 years. d. 5.0 years.
 Capital Budgeting

Combination of Problems-3

3. The accrual accounting rate of return based on

initial investment is

a. 20% b. 15% c. 12% d. 10%

4. In estimating the internal rate of return, the factors

in the table of present values of an annuity should be
taken from the columns closest to the following
multiple.

a. 0.65 b. 4.00 c. 5.00 d. 5.65

 Capital Budgeting

• Hilltop
Hilltop Company invested P100,000 in a two-year
project. Hilltop's expected rate of return was 12%.
The cash flow, net of income taxes, was P40,000 for
the first year. Present value and future value factors
are as follows:

Period Present value Future value

of P1 at 12% P of 1 at 12%
1 .8929 1.1200
2 .7972 1.2544

Assuming that the rate of return was exactly 12%,

what was the cash flow, net of income taxes, for the
second year of the project?

a. P51,247 b. P60,000 c. P64,284 d. P80,638

 Capital Budgeting

REFERENCES:
Chapter 13-A
Capital Budgeting
M11-Chp-13-1A-Capital-Budget-2011-0525
Edited May 25, 2011.
Copyright © 2011, Dr. Howard Godfrey

This file contains illustrative problems that will be used in the lecture to illustrate
important concepts and procedures. See separate PowerPoint file with review material on
interest.