Tejano, Carl Jay F.

FM
BSA3_B

Exercise 6
1.
a.
Sales (200,000 x P100) P20,000,000
Less: Variable cost (200,000 x P60) 12,000,000
Contribution margin 8,000,000
Less: Fixed cost 4,000,000
Depreciation expense 1,500,000 5,500,000
Net Income before tax 2,500,000
Less: Tax (30%) 750,000
Net Income after tax 1,750,000
Add: Depreciation expense 1,500,000
Annual cash return 3,250,000

b. Payback Period: (6,000,000/3,250,000) 1.85 years

c. NPV: (3,000,000 x 3.0370) – 6,000,000 = 3,111,000
d. What is the firm’s profitability index?

2.
a. What is Marquette’s annual after-tax cash flows?
[35,000 - 30% x (35,000 - 15,000)] = 29,000
B. What is Marquette’s payback period?
(150,000/29,000) = 5.17 years
C. What is Marquette’s NPV?
Exercise 7.
1. a.
Year Cash flows
0 1,750,000
1 560,000 (1,190,000)
2 545,000 (645,000)
3 590,000 (55,000)
4 605,000
5 635,000

Months = 55,000 / 605,000 x 12 months = 1.09

Payback period 3 years and 1 month
Based on the payback period, the investment is not recommended as the payback period of 3
years and 1 month exceeds the expected payback period of 3 years.

B. Accounting rate of return or ARR

ARR = Average annual profit / cost of the investment x 100
ARR = 197,500 / 1,750,000 x 100 = 11%

C. Discounted Payback Period

Year Cash flows
0 1,750,000
1 500,000 (1,250,000)
2 434,471 (815,529)
3 419,950 (395,579)
4 384,488 (11,091)
5 360,316

Months = 11,091 / 360,316 x 12 months = 0.37

Payback Period – 4 years approximately ( 4 years and 0.37 months)
D. Net Present Value
Year Cash flows DCF @ 12% Present Value
0 (1,750,000) 1.0000 (1,750,000)
1 560,000 0.8929 500,000
2 545,000 0.7972 434,471
3 590,000 0.7118 419,950
4 605,000 0.6355 384,488
5 635,000 0.5674 360,316
Net Present Value 349,226
The net present value is positive of 349,226 thus it is financially feasible in net present value
terms.
E.
F. Profitability index
= Present value of future cash flows / Initial investment
= 2,099,226 / 1,750,000 = 1.20

Exercise 8
1. a.
=30,000 – 30% (30,000 – 20,000)
=30,000 – 30% (10,000)
=30,000 – 3,000
=27,000
B.
C. IRR of Rottie
=30,000 [1-(1.20)^-5/.05]
=30,000 (11.96244856)
=358,873.45
2.
A. What is the investment required to replace the existing machine?
250,000-90,000-30%(120,000-90,000) = 151,000

B. What is the increase in the annual income taxes if the company replaces the machine?
=30% * (60,000 – 50,000)
=30% (10,000)
=3,000
C The increase in net cash flows
=60,000 – 3,000
=57,000