Maxwell Company has an opportunity to acquire a new machine to replace one of its present machines.

The new machine would cost $90,000, have a 5-year life, and no estimated salvage value. Variable
operating costs would be $100,000 per year. The present machine has a book value of $50,000 and a
remaining life of 5 years. Its disposal value now is $5,000, but it would be zero after 5 years. Variable
operating costs would be $125,000 per year. Ignore income taxes. Considering the 5 years in total, what
would be the difference in profit before income taxes by acquiring the new machine as opposed to
retaining the present one? A. $10,000 decrease B. $15,000 decrease C. $35,000 increase D. $40,000
increase 11. A project under consideration by the White Corp. would require a working capital
investment of $200,000. The working capital would be liquidated at the end of the project's 10-year life.
If White Corp. has an after-tax cost of capital of 10 percent and a marginal tax rate of 30 percent, what is
the present value of the working capital cash flow expected to be received in year 10? a. $36,868 b.
$77,100 c. $53,970 d. $23,130 12. Lyben Inc. is planning to produce a new product. To do this, it is
necessary to acquire a new equipment that will cost the company P100,000. The estimated life of the
new equipment is five years with no salvage value. The estimated income and costs based on expected
sales of P10,000 units per year are: Sales @ P10.00 per unit P100,000 Costs @ P8.00 per unit 80,000 Net
income P 20,000 The accounting rate of return based on initial investment is 20% What will be the
accounting rate of return based on initial investment of P100,000 if management decrease its selling
price of the new product by 10%? a. 5% b. 10% c. 15% d. 20% 13. MLF Corporation is evaluating the
purchase of a P500,000 die attach machine. The cash inflows expected from the investment is P145,000
per year for five years with no equipment salvage value. The cost of capital is 12%. The net present value
factor for five (5) years at 12% is 3.6048 and at 14% is 3.4331. The internal rate of return for this
investment is a. 3.45% b. 2.04% c. 13.8% d. 15.48% MSQ-08 Page 7 14. APJ, Inc. is planning to purchase a
new machine that will take six years to recover the cost. The new machine is expected to produce cash
flow from operations, net of income taxes, of P4,500 a year for the first three years of the payback
period and P3,500 a year of the last three years of the payback period. Depreciation of P3,000 a year
shall be charged to income of the six years of the payback period. How much shall the machine cost? a.
P12,000 b. P18,000 c. P24,000 d. P36,000 15. Sweets, Etc., Inc. plans to undertake a capital expenditure
requiring P2 million cash outlay. Below are the projected after-tax cash inflow for the five year period
covering the useful life. The company’s tax rate is 35%. Year 1 2 3 4 5 P’000 600 700 480 400 400 The
founder and president of the candy company believes that the best gauge for capital expenditure is cash
payback period and that the recovery period should not be more than 75% of the useful life of the
project or the asset. Should the company undertake the project? a. No, since the payback period is 4
years or 80% of the useful life of the project. b. Yes, since the payback period is 3.55 years or 71% of the
useful life of the project. c. No, since the payback period extends beyond the life of the project. d. Yes,
since the payback period is 4 years and still shorter than the useful life of the project. 16. Womark
Company purchased a new machine on January 1 of this year for $90,000, with an estimated useful life
of 5 years and a salvage value of $10,000. The machine will be depreciated using the straight-line
method. The machine is expected to produce cash flow from operations, net of income taxes, of
$36,000 a year in each of the next 5 years. The new machine’s salvage value is $20,000 in years 1 and 2,
and $15,0000 in years 3 and 4. What will be the bailout period (rounded) for the new machine? a. 1.4
years. b. 2.2 years. c. 1.9 years. d. 3.4 years.