POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

SAN JUAN BRANCH

Practice Problems on Financial Management (FIMA 30013) Final Period

Aily F. Corpuz 30/01/2023

BSBAFM 2-2 SCORE:____

Problem 1

a. Calculate each project’s payback period.

Project M: $28,500/ $10,00=2.85years
Project N: 2+[( $27,000- $21,000)/ $9,000]=2.67years

b. Calculate the net present value (NPV) for each project.

c. Calculate the internal rate of return (IRR) for each project.

Discount Rate(%) NPV(M) NPV(N)

0 $11,500 $11,000
5 6,960 6,903
10 3,199 3,490
15 50 618
16 -518 99

Project M: IRR – 15.086%

Project N: IRR – 16.1935%

 d. Summarize the preferences dictated by each measure you calculated and
indicate which project you would recommend. Explain why.

M N
Payback Period 2.85 yrs. 2.67 yrs.
NPV $637 $1,155
IRR 15.1% 16.2%

Project N would be recommended due to the following factors:

(1) higher NPV; (2) shorter payback period; (3) higher IRR. Because it ranks Capital Budgeting,
NPV has much "more power" than IRR.

Problem 2

a. Calculate the book value of the old piece of equipment.

b. Determine the taxes, if any, attributable to the sale of the old equipment.
Net Gain (Loss) = (Selling price of Old Assest – Book Value) x (I – Tax Rate)
Net Gain (Loss) = ( $55,000 - $8,500) x (I – 0.40)
Net Gain (Loss) = 46,500 x 0.60 = 27,900
Tax = 46,500 – 27,900 = 18,600

c. Find the initial investment associated with the proposed equipment

replacement.
Problem 3
a. Determine the initial investment associated with the proposed replacement
decision.

b. Calculate the incremental operating cash inflows for years 1 to 4 associated

with the proposed replacement. (Note: Only depreciation cash flows must be
considered in year 4.)
c. Calculate the terminal cash flow associated with the proposed replacement
decision. (Note: This is at the end of year 3.)

d. Depict on a time line the relevant cash flows found in parts a, b, and c that
are associated with the proposed replacement decision, assuming that it is
terminated at the end of year 3.
Problem 4

a. At what level of sales (in units) would the firm break even on operations (that
is, EBIT $0)?
Q = FC / (P – VC)
Where,
FC = $250 000, VC = $3, P = $7.50
Q = 250 000 / (7.5 - 3) = 55 555 units

b. Calculate the firm’s earnings per share (EPS) in tabular form at (1) the current
level of sales and (2) a 120,000-unit sales level.

c. Using the current $750,000 level of sales as a base, calculate the firm’s degree
of operating leverage (DOL).

DOL = %∆EBIT / %∆Sales = (90 000 / 200 000) / (150 000 / 750 000) = 0.45 / 0.2 =
2.25

Analysis: Relationship between sales volume and EBIT. How does percentage changes in
sales volume impact EBIT? 1% change in sales quantity results in 2.25% change in EBIT

d. Using the EBIT associated with the $750,000 level of sales as a base, calculate
the firm’s degree of financial leverage (DFL).

DFL = %∆EPS / %∆EBIT = (0.315 / 0.22) / 0.45 = 3.18

e. Use the degree of total leverage (DTL) concept to determine the effect (in
percentage terms) of a 50% increase in TOR’s sales from the $750,000 base
level on its earnings per share.

DTL = DOL x DFL = 2.25 x 3. 18 = 7.16

Problem 5

a.

Problem 6

a. Calculate the EOQ.

b. If it takes 20 days to receive an order once it has been placed, determine the
reorder point in terms of gallons of pigment. (Note: Use a 365-day year.)
Problem 7