Problem 2

Ethan Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project.
The financial staff has collected the following information on the project

(a) What is the project's cash flow for the first year (t = 1)
(a) The projected cash flow for the first year:
Project cash flows: t = 1
Sales revenues ₱10,000,000.00
Operating costs ₱7,000,000.00
Depreciation ₱2,000,000.00
EBIT ₱1,000,000.00
Taxes (40%) ₱400,000.00
EBIT (1-T) ₱600,000.00
Add back depreciation ₱2,000,000.00
Project cash flow =
EBOT (1 - T) + DEP ₱2,600,000.00

Problem 3

Nicole Air Services is now in the final year of a project. The equipment originally cost P250 million, of
which 80% has been depreciated. Nicole can sell the used equipment today for P5 million, and its tax
rate is 40%. What is the equipment's after-tax salvage value
Equipment's after-tax salvage value

Equipment's original cost 250 Million

Depreciation (80%) 200 Million
Book value 50 Million

Loss on sale = 5,000,000 - 50,000,000

₱45,000,000.00

Tax savings = 45,000,000. (0.4)

₱18,000,000.00

After-tax salvage value = 5,000,000. + 18,000,000.

₱23,000,000.00

Problem 4

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 Roy Co. is considering the purchase of a new heavy sheet metal press to replace an old press that is in
need of repair. Roy's statement of financial position shows P250,000 in current assets and P175,000 in
current liabilities. The old press requires an inventory of spare parts that has a value of P25,000. These
parts are used throughout the year, and are replaced as they are used. On average, the amount of
accounts payable related to these parts is P5,000. The new machine will require a spare parts inventory
valued at P20,000. On average, the amount of accounts payable related to these parts will be the same
as for the old machine, (i.e., P5,000). If the new machine is purchased to replace the old machine, what
is the incremental investment in net working capital at time zero?
Level of working capital for old machine = 25,000. - 5,000.
₱20,000.00

Level of working capital for new machine = 20,000. - 5,000.

₱15,000.00

Incremental investment in net working capital = 15,000. - 20,000.

-₱5,000.00

Problem 5

Solenn Co. is considering the purchase of a new heavy sheet metal press to replace an old press that is in
need of repair. The old press requires an inventory of spare parts that has a value of P20,000. These
parts are used throughout the year, and are replaced as they are used. On average, the amount of
accounts payable related to these parts is P5,000. The new machine will require a spare parts inventory
valued at P30,000. On average, the amount of accounts payable related to these parts will be P10,000. If
the new machine is purchased to replace the old machine, what is the incremental investment in net
working capital at time zero?
Level of working capital for old machine = 20,000. - 5,000.
₱15,000.00

Level of working capital for new machine = 30,000. - 10,000.

₱20,000.00

Incremental investment in net working capital = 20,000. - 15,000.

₱5,000.00

Problem 6

Hiyas Co. is a chain of discount jewelry stores. Hiyas' management is considering adding a new line of
earrings to each store. The new line is expected to generate additional sales of P750,000 per month,
with 40% of these sales carried as accounts receivable due in 30 days. The initial expenditure for the new
inventory will be P1,000,000. Of this amount, 50% will be financed with trade credit. Based on this
information, what is the investment in net working capital for this project?
1,000,000. + (750,000. x .40) -

Investment in net working capital = (1,000,000. x 0.50)

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 Investment in net working capital = ₱800,000.00

Problems 7 through 9 refer to the Omnibus Plywood Corporation (OPC)

Omnibus Plywood Corporation (OPC) is purchasing new saws for P175,000. Freight costs will be P25,000.
These costs will be capitalized and depreciated. There is no investment tax credit. P50,000 of inventory
will be needed and P22,500 of trade credit is available. Depreciation for tax purposes is P50,000 per year,
and book value is zero at the end of 4 years. OPC expects the new saws to increase annual revenues and
cash expenses by P120,000 and P50,000, respectively. OPC's tax rate is 34%

Problem 7

Based on the information given above, what is the OPC's net investment cash outflow?
175,000. + 25,000. + (50,000.
Net investment cash flow -
= 22,500.)

Net investment cash flow = ₱227,500.00

Problem 8

Based on the information given above, what is the annual operating cash flow expected from the new
saws?
(120,000. - 50,000)(0.66) +
Operating cash flow = (50,000.)(0.34)

Operating cash flow = ₱63,200.00

Problems 14 through 19 refer to the Romualdez Manufacturing Company

You are the financial manager of Romuladez Manufacturing Company (a large and highly profitable
manufacturing company). You are currently evaluating a project proposal involving the production of a
new product line. The proposed project will have a 3-year life and will require the purchase of new
capital equipment with a total purchase price of P2,000,000. In addition, the project will require an initial
P250,000 investment in supplies and spare parts for the equipment, with 60% of this amount financed
with trade credit. The new product line is expected to increase cash sales by P800,000 per year and
increase cash operating expenses by P350,000 per year. The new equipment will have a 5-year life. At
the end of three years, you expect to terminate the project, liquidate the supplies and parts, and sell the
equipment for P100,000. Assume that the marginal tax rate is 34%.

Problem 14

Based on the information given above, what is the net investment cash outflow for this project?
Net investment cash outflow for this project = 2,000,000. + (250,000. x 0.40)
Net investment cash outflow for this project = ₱2,100,000.00

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 Problem 15

Based on the information given above, what is the operating cash flow for the first year of the project's
life?
Operatng cash flow (1st year) = (2,000,0
(800,000. - 350,000.) (0.66) +

Operatng cash flow (1st year) = ₱512,333.00

Problem 16

Based on the information given above, what is the operating cash flow for the second year of the
project's life?
(800,000. - 350,000.) (0.66) +
Operating cash flow (2nd year) = (215,333.)

Operating cash flow (2nd year) = ₱512,333.00

Problem 17

Based on the information given above, what is the operating cash flow for the third year of the project's
life?
(800,000. - 350,000.) (0.66) +
Operating cash flow (3rd year) = (215,333.)

Operating cash flow (3rd year) = ₱512,333.00

Problem 18

Based on the information given above, what is the tax effect of selling the equipment at the end of the
third year?
Book Value = 2,000,000. - 1,900,000.
If sold for 100,000., no gain or loss will
₱100,000.00 occur.

Taxes = (100,000. - 100,000.)(0.34)

₱0.00

Problem 19

Based on the information given above, what is the project-disposal cash flow (not including the annual
operating cash flow)?
Project-disposal cash flow (end of 3rd year)
Recovery of net working capital ₱100,000.00

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 (250,000. x 0.40)
Proceeds from sale of equipment ₱100,000.00
Total ₱200,000.00

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