One (1) unit Machine and Computer package, apply the following capital

budgeting techniques to determine the acceptability of the projects:

Project A: A new machine to manufacture new product submitted by

Production Dept.

Given:
Net Cash outlay P215,000
Net Cash inflows P 59,375
Terminal cash flow 46,250
WACC 13%

A. Cash Payback Period

Formula: Net Cash outlay/ Net Cash inflows
= 215,000 / 59,375
= 3.62 or 3 year and 7.44 months

D. Net Present Value method

Formula: PV of cash inflows= NCI x rate
PV of Terminal Cash flow= TCF x rate
PV of cash inflows + PV of Terminal Cash flow
Total PV of cash inflows - NCO

Solution: 59,375 x 3.998 = 237,381.25

46,250 x 0.480 = 22,200.00
= 259,581.25
259,581.25 - 215,000.00 = 44,581.25
=44,581.25
 B. Accounting rate of return C. Discounted payback period
Formula: Profit / Net cash outlay Formula:
= 31,875 / 215,000
= 14.83%

Solution:

E. Internal Rate of return (IRR)

Formula:

minal Cash flow

Solution:
Discounted payback period
PV for 5 years = NCI x rate
PV on the 6th year = NCI x rate
NCO - NCI = Total / PV on the 6th year = Total x 12 months

= 59,375 x 3.517 = 208,821.87

= 59,375 x 0.480 = 28, 500
215,000 - 208,821.87 = 6,178.13 / 28,500 = .217 x 12 = 2.60 months
= 2.60 months

Internal Rate of return (IRR) F. Modified Internal rate of return (MIRR)

Approximate IRR = NCO /NCI Formula:
Difference

Interpolate:

215,000 / 59,375 = 3.621

PVannuity = between 16-17%

Exact IRR = 16% = 3.685 - 3.621 = 0.064 Solution:

= 17%= 3.589
Difference 1% = 0.096
Interpolate= 16% + (0.064/0.096 x1%) = 16.67%
=16.67%
ernal rate of return (MIRR)
Up to Last year NCI x
NCI x
Year 1 NCI x
Terminal Value
Approximate MIRR = NCO/ Terminal Value

Rate + (First rate estimated / )

6th yr =59,375 x 1.0 =59,375.00

5thyr =59,375 x 1.13 = 67,093.75
4th yr = 59,375 x 1.277 = 75,821.88
3rd yr =59,375 x 1.443 = 85,678.13
2nd yr =59,375 x 1.630 = 96,781.25
1st yr = 59,375 x 1.842 = 109,368.75
Terminal value = 494,118.76
Approximate MIRR = 215,000 / 494,118.76 = 0.435
(F) between 15-16%

14% = 0.456 - 0.435 = 0.021

15% = 0.432
1%= 0.024

MIRR = 14% + (0.021/0.024 x1%)= 14.88%

Project B: Computer units submitted by the Admin Department

Given:
Net Cash outlay 145,000
Net Cash Inflows :
Y1 P73,500 ; Y2 P70,125; Y3 P66,750; Y4 P63,375
Terminal cash flow 25,000
WACC 15%

A. Cash Payback Period B. Accounting rate of return

Formula: Cash outlay - Cash Inflows 1-2yrs Formula :
Remaining balance / Inflow in 3rd yr

Solution : 145,000 - 143,625= 1,375 Solution:

1,375 ./ 66,750= 0.021
0.021 x 12 = 0.252 0r 1 month

Cash payback period= 2 years and 1 month

Accounting rate of return C.Discounted Payback period
Average net income= Formula:
= Profit/Net cash outlay

Average net income= 19,500 + 29,625 +39,750 +49,875 /4

=34,687
= 34,687/ 145,000
=23.92%

Solution:
Discounted Payback period D. Net Present Value method
1st yr = 1st yr x rate Present value of operating cash inflows:
2nd = 2nd yr x rate (P63,945 + P 53,014.50 + P 43,921.50 + P36,250.5)
3rd = 3rd yr x rate P197,131.50 Present value of terminal cash flow (P25,000 x
0.572) = 14300
Remaining balance to recover = NCO -PV of cash inflow
Total PV of cash inflows
4th yr= 4th yr x rate P211,431.50
Total cost of investment (NCO)
Monthsto recover= remaining bal. / 4th yr= total x1 145,000
Net Cash Present Value (NPV)
1st yr = 73,500 x 0.870 = 63,945 P 66,431.50
2nd yr = 70,125 x 0.756 = 53,014.50
3rd yr = 66,750 x 0.658 = 43,921.50
Total PV (1-3 yrs) = 160,881

145,000 - 160,881 = -15,881

4th yr = 63,375 x 0.572 = 36,250.5

Moths to recover = -15,881 / 36,250.5 = -0.44 x12 = -5.28

Months discounted payback period= 2 years and 3months

 E. Internal Rate of return (IRR)
Average cash inflows:( P73,500 + P70,125 + P66,750 + P63,375)/4 = P 68,437.50
3,921.50 + P36,250.5)
erminal cash flow (P25,000 x
Approximate IRR : 145,000/68,437.50 = 2.119 (at n=4) = between
31% - 32%
Exact IRR: @ 31% - 2.130 - 2.119 = 0.011
@32% - 2.100
Difference = 1% OR 0.030
Interpolation = 31% + (0.011/0.030x .01) = 31.37%
 F. Modified Internal Rate of return(MIRR)
5)/4 = P 68,437.50 4th year = 73,500 x
1.0 = P 73,500
3rd year = 70,125 x
1.15 = 80,643.75
2nd year = 66,750 x
1.323 = 88,310.25
1st year = 63,375 x 1.521 = 96,393.38
Total Terminal value = P338,847.38

Approximate MIRR = 145,000/338,847.38 = 0.428 (F) - between

23% - 24 %

Exact MIRR = 23% = 0.437 - 0.428 = 0.009

Difference = 1% 0.014

Interpolate:
MIRR (Exact) = 23% + (0.009/.014 x .01) = 23.64%

Project A WACC
Cash Payback Period 3 years and 7.44 Months 13%
Accounting Rate of Return Discount 14.83% 13%
Payback Period Net 3 years and 3 months 13%
Present Value Method P 44,581.25 13%
Internal Rate of Return 16.67 % 13%

Project B WACC
2 years and 1 month 15%
23.92 % 15%
2 years and 3 months 15%
P 66,431.50 15%
31.37% 15%
Decision
ACCEPT
ACCEPT
ACCEPT
ACCEPT
ACCEPT

Decision
ACCEPT
ACCEPT
ACCEPT
ACCEPT
ACCEPT