CAPITAL INVESTMENT

CONCEPTUAL EXERCISES
FINALS

Illustrative Concept 3

On land worth P800,000 an investor constructs a building worth P3,000,000 containing

a theater, a bank, stores and offices. The owner estimates that annual receipts from
rentals will be P720,000, and annual receipts from insurance and maintenance of the
building will be P80,000. He also estimates that the land can be sold for P1,200,00,
money is now earning 15% before taxes, will this property earn enough for the
investment to be justified?

Conceptual Exercises 3

An existing machine in a factory has an annual maintenance cost of P40,000. A new

and more efficient machine will require an investment of P90,000 and is estimated to
have a salvage value of P30,000 at the end of 8 years. Its annual expenses for
maintenance and upkeep, etc. total P22,000. If the company expects to earn 12% on its
investment, will it be worthwhile to purchase the new machine using the:

(a) present - worth method?

(b) rate - of- return method?

Conceptual Exercises 4

A contractor can purchase a dump truck for P850,000. It is estimated that if sold at the
end of 7 years it will have a value of P100,000. Its estimated annual maintenance cost
is P12,000, and daily operating expenses are estimated to be P320 including the wage
of the driver. It is also possible to hire a similar unit for P1,200 a day including fuel cost.
If money is worth 10%, how many days a year must the dump truck be used to justify
the purchase of the truck?