BUSINESS FINANCE REVIEWER - ARABACA KIM Example 1: ABCD Company is considering a project requiring an

initial investment of Php 120,000.00. The project is expected to

MOD. 7- CAPITAL BUDGETING AND TOOLS (PAYBACK PERIOD, realize annual cash returns of Php 25,000.00 for 6 years. Calculate
NPV AND IRR) the payback period of the project.

Pre-Test Payback period

1. It is a method that evaluates a project by measuring the time = Initial Investment / Annual Cash returns
(usually = Php 120,000.00 / Php 25,000.00
expressed in years) it will take to recover the initial investments. = 4.8 years.
B. payback method In this example, ABCD Company will accept the project because
the payback period is 4.8 years shorter than 6 years
2. It is the process that a business use in evaluating and selecting
major projects Uneven Cash Returns
or investment. - When the cash returns are uneven, the payback period is
A. capital budgeting computed by adding the cash returns until the total is equal to
the investment.
3. These are competing projects that the approval of one
eliminates the others. 2. Net Present Value (NPV)
B. mutually exclusive projects - This refers to the difference between the present value of cash
inflows and the net present value of cash outflows over a period.
4. These are the net cash inflows one expects to get when the - It is used in capital budgeting and investment planning to
business or project analyze if the project is profitable or not.
has already started.
A. cash returns *If the NPV is positive, the project or investment should be
accepted. If it is negative, it means that it will result to a loss so it
5. This refers to the difference between the present value of cash should be rejected.
inflows and the
net present value of cash outflows over a period.
C. net present value

6. The discount rate that makes the net present value of an

investment equals
to zero is called ________.
A. internal rate of return

7. The projects that do not compete with other projects are called
________.
A. independent projects

8. If the net present value is ___________, the project should be

accepted.
C. positive

9. If the net present value is ___________, the project should be

rejected. 3. Internal Rate of Return (IRR)
D. negative - The IRR is the most used technique in capital budgeting.
- It is defined as the discount rate that makes the net present
10.When the cash returns are ________, the payback period is value of an investment equals to zero.
computed by adding the cash returns until the total is equal to
the investment. Example 4: ABCD Company is evaluating the profitability of
B. uneven Project A. It requires Php 100,000.00 of funding and after one
year, the company is expected to receive Php125,000.00.
Directions: Arrange the following steps in capital budgeting in Compute for the internal rate of return.
order from numbers 1 to 5.
11. Review and Analysis - 2 IRR = Php 25,000.00/Php 100,000. 00 = .25 or 25%
12. Investment Proposal - 1 NPV = Php 125, 000/(1+.25) – Php 100,000.00 = 0
13. Decision-making - 3
14. Monitoring - 5 MOD. 5.1- TYPES OF INVESTMENTS (FEATURES, ADVANTAGES
15. Implementation - 4 AND DISADVANTAGES)

CAPITAL BUDGETING -is the process that a business uses in Pre -Test
evaluating and selecting major projects or investment. True or False: Write True if the statement is correct and False if it
is wrong.
Tools in Capital Budgeting TRUE 1. The decision to establish an investment plan is an
1. Payback Method important first step to accomplishing your financial goals.
- It is a method that evaluates a project by measuring the time TRUE 2. There are two types of stocks – common stocks and
(usually expressed in years) it will take to recover the initial preferred stocks.
investments. FALSE 3. A short-term investment objective is defined as one
that will be be accomplished within a period of two to five years.
TRUE 4. An emergency fund is a certain amount of money
that can be obtained quickly in case of immediate need.
TRUE 5. Stock prices fluctuate due to competition and
movements in market prices.
TRUE 6. Liquidity is the ease with which an asset can be
converted to cash without substantial loss in peso value.
FALSE 7. Preferred stock represents the most basic form of
corporate ownership.
FALSE 8. A line of credit is a short-term loan that is approved
before the money is actually needed.
TRUE 9. One of the major assumptions in investment is that
investors base their decisions strictly on expected return and risk
factors.
FALSE 10. Bondholders generally receive interest payments every
six months.
Types of Investments and Its Features:
1. Investing in a Bank
- Savings account
- Time deposit
~ Earns minimal interest, easily withdrawable, least
risky, insured with PDIC up to P500,000.
~ Higher interest, withdrawal after the fixed time, i.e.
90days, one year, etc.,
2. Investment in Bonds
~Like an IOU (I owe you) issued by a government or
company with fixed interest rate-called coupon.
3. Investment in Shares
of Stocks
~ Like buying a small part of a company, earnings
through dividends and capital gains as price increases.
4. Managed funds
~ An investment company, which pools the money of
various investors and invest that money in bonds,
stocks or a combination of various investments.
5. Investment in Property
~ Can either be real property (real estate) or tangible
personal property (gold, precious metals, artworks,etc.)
Advantages and Disadvantages of the Different Types of
Investments:
MOD. 5.2 - Investment risk: Ways and means to minimize
investment risk
RISK
- is defined as a chance of loss. In finance, it is the chance that
the actual return would be different from the expected return on
an investment.
There are two fundamental types of risks:
1. Systematic Risk – has effects that are wider in scope. It is
almost impossible for an investor to avoid this type of risk.
Examples are: natural disaster- a massive
earthquake, a major political event- a coup de’ etat or a covid19
pandemic.
2. Unsystematic Risk – also referred to as specific risk, which
affects only a small number of assets.
Examples would be a firm whose employees went on strike or a
major stockholder getting involved in a crime or scandal.
*Investors resort to diversification which is a risk management
technique wherein an investor includes a wide variety of assets or
investment products in his portfolio of investments to minimize or
protect themselves from unsystematic risk.
Ways and Means to Minimize Investment Risks:
1. Determination of tolerance to different kinds of risk
- Understanding the type of risk, or the combination of types of
risk, is essential in reducing those risks.
Two factors that can help determine the risk tolerance are:
a. Net worth – is assets minus liabilities.
b. Risk capital – is money that, if lost on an investment, won’t
impact the financial position and lifestyle.
2. Conducting due diligence
- This means making research about the investment instruments,
checking out the investment’s history, earnings’ growth,
management team and debt load.
3. Diversification of investment portfolio
- Diversification is a risk management strategy of combining a
variety of assets to reduce overall risk in an investment portfolio.
One of its purpose is portfolio risk management.
4. Monitoring of investments
- Regular reallocation of resources is necessary for control
purposes. Proper allocation of investments depends on such
factors as age, investment period and investment temperament.
5. Taking advantage of government guaranteed investment
products
- It is very safe to invest in an instrument which is guaranteed by
the government like Treasury bonds.
- These investments are fully backed by the Philippine
government aside from an insurance from the Philippine Deposit
Insurance Corporation (PDIC)
MOD. 6.1 - PRINCIPLES OF FINANCIAL MANAGEMENT
What Is Personal Finance?
- is a term that covers managing your money as well as saving and
investing.
Personal finance
- is about meeting personal financial goals, whether it’s having
enough for short-term financial needs, planning for retirement, or
saving for your college education.
Pre-Test
1. It is a term that covers managing your money as well as saving
and investing.
C. Personal Finance

2. Saving money means giving up the opportunity cost to

D. spend in the present

3. What is term for the money you earn?

B. Income

4. Personal Finance is the process of planning your

A. financing
B. investing
C. spending
D. all of these

5. In order to effectively manage money, you need a:

A. Budget

6. The following are considered personal finance strategies

EXCEPT:
C. Limit Asset

7. The three key principles in personal money management are:

A. assessment, prioritization, and restraint

8. What percentage of your income do most financial gurus

recommend saving?
B. 10% or 20 %

9. Which of the following money management principles describe

frugality?
B. Small amounts matter

10. Practice thrift, but always be looking for Big Wins, best
illustrates what principle
of saving?
A. Large amounts matter more

11. Don’t let one slip-up drag you down also means:
B. Failure is okay

12. Pay-Yourself-First Philosophy can be applied in:

A. creating an emergency fund

13. To make the most of your income and savings it is important

to become:
A. Financial Literate
C. Smart
B. Proactive
D. All of these

14. Your circumstances might not be your fault, but they're your
responsibility, best MONEY MANAGEMENT PRINCIPLES/CYCLE:
illustrate what principle of money management? AREAS OF PERSONAL FINANCE
D. You are the boss of you.

15. What concept is best explained by the statement, “Trust that - The main areas of personal finance are income, spending, saving,
you'll pick up investing, and protection. Each of these areas will be examined in
momentum in the future”. more detail below.
A. Action is the cornerstone of success
#1 Income
Income refers to a source of cash inflow that an individual
receives and then uses to support themselves and their family. It
is the starting point for our financial planning process.

Common sources of income are:

• Salaries
• Bonuses
• Hourly wages
• Pensions
• Dividends
*These sources of income all generate cash that an individual can
use to either spend, save, or invest.

#2 Spending
- Spending includes all types of expenses an individual incurs
related to buying goods and services or anything that is
consumable (i.e., not an investment).
- All spending falls into two categories: cash (paid for with cash on
hand) and credit (paid for by borrowing money). The majority of
most people’s income is allocated to spending.

Common sources of spending are:

• Rent
• Mortgage payments
• Taxes
• Food
• Entertainment
• Travel
• Credit card payments

#3 Saving
- Saving refers to excess cash that is retained for future investing
or spending. If there is a surplus between what a person earns as
income and what they spend, the difference can be directed
towards savings or investments.

Common forms of savings include:

• Physical cash
• Savings bank account
• Checking bank account
• Money market securities

#4 Investing
- Investing relates to the purchase of assets that are expected to
generate a rate of return, with the hope that over time the
individual will receive back more money than
they originally invested.
- Investing carries risk, and not all assets actually end up
producing a positive rate of return. This is where we see the
relationship between risk and return.

Common forms of investing include:

• Stocks
• Bonds
• Mutual funds
• Real estate
• Private companies
• Commodities
• Art

#5 Protection
- Personal protection refers to a wide range of products that can
be used to guard against an unforeseen and adverse event.

Common protection products include:

• Life insurance
• Health insurance
• Estate planning