Test I. Matching Type: Select from the following terminologies as your answers.

Write only the letters

representing your answers on the spaces provided before the numbers.

A. Avoidance analysis . B. Constraint analysis. C. Discounted cash flow analysis

D. Throughput analysis E. Capital budgeting F. Accounting Rate of Return
G. Internal Rate of Return H. Net Present Value I. Payback Period
J. Profitability Index K. Market Structure L. Monopolistic Competition,
M. Monopoly N. Oligopoly Market O. Perfect Competition

K___1. Refers to the characteristics of the market either organizational or competitive, that describes
the nature of competition and the pricing policy.
E___2. The process of analyzing and ranking proposed projects to determine which ones are deserving
of an investment.
O___3. A market structure where a large number of buyers and sellers are present, and all are engaged
in the buying and selling of the homogeneous products at a single price prevailing in the market.
L___4. There are a large number of firms that produce differentiated products which are close
substitutes for each other.
N___5. Characterized by few sellers, selling the homogeneous or differentiated products.
I____6. Measures the time in which the initial cash flow is returned by the project.
F___7. Refers to the profitability of the project calculated as projected total net income divided by
initial or average investment.
M___8. Refers to a market structure where a single firm controls the entire market
G___9. The discount rate at which net present value of the project becomes zero.
J___10. The ratio of present value of future cash flows of a project to initial investment required for
the project
I___11. Measures the time in which the initial cash flow is returned by the project
H___12. Equal to initial cash outflow less sum of discounted cash inflows.
B___13. Identifies the bottleneck machine or work center in a production environment
and invest in those fixed assets that maximize the utilization of the bottleneck operation.
A___14. Determines whether increased maintenance can be used to prolong the life of existing assets,
rather than investing in replacement assets.
D___15. Determines the impact of an investment on the throughput of an entire system.

Test II. Write C if the statements are true and W for false statements.

W__1. In monopolistic competition, the firm is an industry itself.

C__2.The demand curve under monopoly market is downward sloping, which means the firm can earn
more profits only by increasing the sales which are possible by decreasing the price of a product.
C__3. The only way to increase throughput is to maximize the throughput passing through the
bottleneck operation.
C__4. Capital budgeting is a mandatory activity for larger fixed asset proposals because, The amount
of cash involved in a fixed asset investment may be so large that it could lead to the bankruptcy
of a firm if the investment fails.
W__5. The simplest and least accurate evaluation technique is the discounted payback method.
C__6. Accounting Rate of Return is the profitability of the project where the net income is not
discounted.
W__7. Net present value is one of the most reliable measures used in capital budgeting though it does
not account for time value of money for it does not use discounted cash flows in the calculation.
C__8. Hurdle rate is the rate used to discount the net cash inflows.  Weighted average cost of capital
(WACC) is the most commonly used hurdle rate.
C__9. If the cash inflows are uneven or not uniform in amount, we need to calculate the present value
of each individual net cash inflow separately per period.
C__10. In case of standalone projects, accept a project only if its NPV is negative, reject it if its NPV is
positive and stay uninterested between accepting or rejecting if NPV is zero.
W__11. Net present value is inferior than some other discounted cash flows techniques such as IRR. In
situations where IRR and NPV give conflicting decisions, IRR decision should be preferred.
W__12. A project should only not be accepted if its IRR is more than the target internal rate of return.
When comparing two or more mutually exclusive projects, the project having lowest value of
IRR should be accepted.
C__13. Profitability index is actually a modification of the net present value method.
C__14. Profitability index is sometimes called benefit-cost ratio too and is useful in capital rationing
since it helps in ranking projects based on their per dollar return.
W__15. The monopolistic completion market is characterized by few sellers, selling the homogeneous
or differentiated products.
W__16. Under perfect competition, every firm advertises their products on a frequent basis, with the
intention to reach more and more customers and increase their customer base.
W__17. In non-collusive oligopoly, instead of competing with each other, the firms come together and
with the consensus of all fixes the price and the outputs.
W__18. Under perfect competition, the firm has full control over the supply and price of a product. The
elasticity of demand is zero for the products.
C__19. The oligopoly market structure lies between the pure monopoly and monopolistic competition.
C__20. The monopolistic competition is also called as imperfect competition because this market
structure lies between the pure monopoly and the pure competition.

Test III. (20 pts) Write in the box YES if the features listed below describe or belong to the features
of the respective market structures and write NO if they are not

Feature Free Monopolistic Oligopoly Monopoly

Competition Competition
Easy/Free Entry and Exit 1.Yes .1. Yes 1. No 1. No
Interdependent decision making 2. No 2. No 2. Yes 2. No
Differentiated Product 3. No 3. Yes 3. Yes 3. No
Close Substitutes Available 4. Yes 4. Yes 4. Yes 4. No
Price Makers 5. No 5. No 5. No 5. Yes

Test IV- Problem Solving:

1. Company X is planning to undertake another project requiring initial investment of $100,000 and is
expected to generate $30,000 in Year 1, $40,000 in Year 2, $60,000 in year 3, and $20,000n Year 4..
Requirement: You are to calculate the following: A. payback value of the project. B. Discounted
payback period at 10%. C. Profitability Index, and D. Internal Rate of Return assuming that the exact
IRR is between 15% and 20%.

A. Payback Period
Year Cash Flow Cumulative
Cash Flow
0 100,000 -100,000
1 30,000 -70,000
2 40,000 -30,000
3 60,000 30,000
4 20,000 50,000

Payback Period = 2 + 30,000/60,000

= 2 + 0.5 = 2.5 years

B. Discounted Payback Period at 10% interest target rate.

Year Cash Flow Present Value Discounted Cumulative

Factor CF/(1+i)n Cash Flow Discounted
Cash Flow
0 100,000 1.00 (100,000) 100,000
1 30,000 0.9091 27,272.73 -72,727.27
2 40,000 0.8264 33,057.85 -39,669.42
3 60,000 0.7513 45,078.89 5,409.47
4 20,000 0.6830 13,660.27 19,069.74

Discounted Payback Period = 2 + (39,669.42/45,078.89)

= 2 + 0.879999 = 2.88 years

C. Profitability Index
PV of Cash Flows = 27,272.27 + 33,057.85 + 45,078.89 + 13,660.27 = $119,069.74
P I= 119,069.74/100,000 = 1.19 Or PI = 1+ (19,069.74/100,000) = 1.19

D. Internal Rate of Return assuming that the exact IRR is between 15% and 20% and
At 15% NPV = 30,000 + 40,000 + 60,000 + 20,000 - 100,000
(1.15)1 (1.15)2 (1.15)3 (1.15)4
NPV = 26,086.97 + 30,245.75 + 39,450 + 11,435.07 – 100,000
= $107,217.79 - $100,000 = $7,217.79

At 20% NPV = 30,000 + 40,000 + 60,000 + 20,000 - 100,000

(1.20)1 (1.20)2 (1.20)3 (1.20)4

NPV = 25,000 + 27,777.78 + 34,7222.22 +9,145.06 – 100,000

 = $97,145.06 - $100,000 = -$7,215.76

The exact IRR that will equal to $100,000 - Using Interpolation

15% $ 107,217.79 $7,217.79
IRR $100,000.00
20% $97,145.06 $10,072.73

IRR = 0.15 + 0.05 (7,217.79/10,072.73)

= 0.15 + 0.05 (0.716567405053)
= 0.15 + 0.0358283837026 = 0.18583 or 18.58%

2. Company B is planning to purchase a machine worth $220,000 with a straight line depreciation and
scrap value of P20,000 at the end of four years. The machine is expected to generate $60,000 in Year 1,
$80,000 in Year 2, $70,000 in year 3, and $90,000n Year 4.. Requirement: You are to calculate the
following: A. Accounting Rate of Return and B. Net Present Value at 10%.

A. Accounting Rate of Return

Step 1: Annual Depreciation = ( $220,000 – 20,000 ) / 4 = $50,000
Step 2: Year 1 2 3 4
Cash Inflow 60,000 80,000 70,000 90,000
Salvage Value 20,000
Depreciation* -50,000 -50,000 -50,000 -50,000
Accounting Income 10,000 30,000 20,000 60,000

Step 3: Average Accounting Income = (10,000 + 30,000 + 20,000+ 60,000)/4 = 30,000

Step 4: Accounting Rate of Return = 30,000 / 220,000 = 13.64%

B. Net Present Value

Year 1 2 3 4
Cash Inflow 60,000 80,000 70,000 90,000
Salvage Value _________ 20,000
Total Cash Inflow 60,000 80,000 70,000 110,000
× Present Value Factor 0.9091 0.8264 0.7513 0.6830
Present Value of Cash Flows $ 54,546 $66,112 $52,591 $75,130
Total PV of Cash Inflows $ 248,379 $248,384.67
− Initial Investment _220,000_ 220,000.00
Net Present Value $ 28,379 $ 28,384.67