Problem 1

1. Internal rate of return = Investment required / Annual net cash inflow

= P240,310 / P70,000
= 3.433 PV factor of IRR
n= 5 years
IRR = 14%

2.
Years Cash flow 14 factor PV of cash flow
Initial Now P240,310 1.000 P240,310
investment
Annual cash 1-5 years P70,000 3.433 P240,310
inflow
Net present 0
value

The net present value is zero thus, the equipment should be purchased.

3. Internal rate of return = Investment required / Annual net cash inflow

= P240,310 / P65,015
= 3.696 PV factor of IRR
n= 5 years
IRR = 11%

Problem 2
1.
Mr. Al Aska
Income Statement
For the Year Ended Dec 31, 20XX

Sales P1,500,000
Variable expenses (300,000)
Contribution margin P1,200,000
Fixed expenses:
Operating cost P350,000
Rents 210,000
Insurance 17,500
Utilities 135,000
Commission 187,500
Depreciation 84,000 984,000
Net operating income P216,000
2. ARR = Net income / Investment required

= P216,000 / P1,350,000

= 0.16 or 16%

Mr. Aska should acquire the franchise because the simple rate of return promised by the
outlet exceeds the required 12%.

3. Payback period = P1,350,000 / P300,000* *

(216,000 + 84,000)

= 4.50 years

Mr. Aska will not acquire the franchise because the payback period is not lower than or
equal to the stipulated payback period.