PHINMA UNIVERSITY OF ILOILO

COLLEGE OF ACCOUNTANCY
FIN 072-FINANCIAL MARKETS

PART 1: WRITE THE LETTER OF THE CORRECT ANSWER

1. A thorough evaluation of how well a project’s actual performance matches

the projections made when the project was proposed is called a
A. post-audit C. risk analysis
B. pre-audit D. sensitivity analysis

2.Competing investment projects where accepting one project eliminates the

possibility of taking the remaining projects is referred to as:
A. Common projects C. Mutually-exclusive projects
B. Independent projects D. Mutually-inclusive projects

3. Mutually exclusive projects are those that

A. require all managers to consider.
B. if accepted, preclude the acceptance of competing projects.
C. if accepted, can have a negative effect on the company’s profit.
D. if accepted, can also lead to the acceptance of a competing project.

4. In which circumstances should the tax consequences be considered when

making capital investment decisions?
A. Depreciation C. Positive net income
B. Disposal of an asset D. All of the given choices

5. If there were no income taxes,

A. the NPV method would not work.
B. all potential investments would be desirable.
C. income would be discounted instead of cash flow.
D. depreciation would be ignored in capital budgeting.

6. Which statement is most correct concerning depreciation in a capital

budgeting analysis?
A. Depreciation is a cash flow and does affect the tax cash flow.
B. Depreciation is not a cash flow but does affect the tax cash flow.
C. Depreciation is a cash flow but does not affect the tax cash flow.
D. Depreciation is not a cash flow and does not affect the tax cash flow.

7. Depreciation charges indirectly affect the after-tax cash flow because the
company
A. Cannot deduct depreciation expenses on their income tax returns.
B. Can deduct depreciation expenses on their financial statements,
increasing cash inflows.
C. Can deduct depreciation expenses on their income tax returns,
reducing cash outflow for taxes.
D. Can deduct depreciation expenses on their financial statements,
reducing reported income before tax.

8. The primary advantages of the average rate of return method are its ease
of computation and the fact that:
 PHINMA UNIVERSITY OF ILOILO
COLLEGE OF ACCOUNTANCY
FIN 072-FINANCIAL MARKETS
A. Rankings of proposals are necessary
B. It is especially useful to managers whose primary concern is liquidity
C. It emphasizes the amount of income earned over the life of the
proposal
D. There is less possibility of loss from changes in economic conditions
and obsolescence when the commitment is short-term

9. Which of the following capital budgeting methods is the least theoretically

correct?
A. internal rate of return C. payback method
B. net present value D. none of the given choices

10. If a payback period for a project is greater than its expected useful life, the
A. project will always be profitable.
B. entire initial investment will not be recovered.
C. project’s return will always exceed the company’s cost of capital.
D. project would only be acceptable if the company’s cost of capital was
low.

11. Bravado Company is considering to replace its old equipment with a new
one. The old equipment had a net book value of P100,000 and 4
remaining useful years with P25,000 depreciation each year. The old
equipment can be sold at P80,000. The new equipment costs P160,000,
have a 4-year life. Cash savings on operating expenses before 40%
taxes amount to P50,000 per year.
What is the amount of investment in the new equipment?
A. P 68,000 C. P 80,000
B. P 72,000 D. P160,000

12. An asset was purchased for P66,000. The asset is expected to last for 6
years and will have a salvage value of P16,000. The company expects
the income before tax to be P7,200 and the tax rate applicable to the
company is 30%. What is the average return on investment (accounting
rate of return)?
A. 7.6% C. 12.3%
B. 10.9% D. 17.6%

13. A piece of labor saving equipment that Marubeni Electronics Company

could use to reduce costs in one of its plants in Angeles City has just
come onto the market. Relevant data relating to the equipment follow:
Purchase cost of the equipment P432,000
Annual cost savings that will be provided by the equipment 90,000
Life of the equipment 12 years
What is the simple rate of return to be provided by the equipment?
A. 12.50% C. 20.83%
B. Between 15% and 18% D. 25.00%

14. The Hills Company, a calendar company, purchased a new machine for
P280,000 on January 1. Depreciation for tax purposes will be P35,000
annually for eight years. The accounting (book value) rate of return
 PHINMA UNIVERSITY OF ILOILO
COLLEGE OF ACCOUNTANCY
FIN 072-FINANCIAL MARKETS
(ARR) is expected to be 15% on the initial increase in required
investment. On the assumption of a uniform cash inflow, this investment
is expected to provide annual cash flow from operations, net of income
taxes, of
A. P35,000 C. P42,000
B. P40,250 D. P77,000

15. If an asset costs P35,000 and is expected to have a P5,000 salvage value
at the end of its ten-year life, and generates annual net cash inflows of
P5,000 each year, the cash payback period is
A. 5 years C. 7 years
B. 6 years D. 8 years

16. Machine Manufacturing Company considers a project that will require an

initial investment of P500,000 and is expected to generate future cash
flows of P200,000 for years 1 through 3 and P100,000 for years 4 through
7. The project’s payback period is:
A. 1.67 years C. 3.33 years
B. 2.50 years D. 3.50 years

17. Vinson Industries, Inc. requires all its capital investment projects to have a
payback period of 5 years or shorter. Vinson is currently considering an
equipment purchase that has an initial cost of P900,000. The equipment
is expected to have a ten-year life and a salvage value of P50,000.
Assuming cash flows are equal, how much annual cash inflows are
necessary in order to meet the payback period requirement?
A. P 90,000 C. P180,000
B. P 170,000 D. P190,000

18. Polar Company purchased an asset costing P90,000. Annual operating

cash inflows are expected to be P20,000 each year for six years. No
salvage value is expected at the end of the asset’s life. The company
applies a 16 percent minimum acceptable rate of return for this kind of
investment. The details of the present values at 16%, six periods are:
Present value of ordinary annuity of 1 3.6847
Present value of annuity due of 1 4.2743
Assuming Polar’s cost of capital is 16 percent, what is the asset’s net
present value? (ignore income taxes).
A. P(16,306) C. P 4,800
B. P (4,514) D. P 30,000

19. An investment opportunity costing P 110,000 is expected to yield net cash

flows of P 28,000 annually for six years. The NPV of the investment at a
cutoff rate of 12% would be: (Round off PV factors based on three
decimal places)
A. (P 5,108) B. P 110,000 C. P 5,108 D. P 115,108

20. Pilar acquired a machine that has a useful life of 10 years with no salvage
value. The incremental annual net income before taxes is P 8,500.
Income taxes are 25%. The PV of an annuity of P 1 for 10 years at 18% is
 PHINMA UNIVERSITY OF ILOILO
COLLEGE OF ACCOUNTANCY
FIN 072-FINANCIAL MARKETS
4.494. The annual depreciation is P 5,000. The NPV is positive P 1,119.25.
How much is the amount of investment?
A. P 30,000 B. P 50,000 C. P 40,000 D. P 60,000

PART II. PROBLEM-SOLVING

1. Rusk Company is considering replacing a machine that has the

following characteristics.
Book value $200,000
Remaining useful life 4 years
Annual straight-line depreciation $ ???
Current market value $160,000
The replacement machine would cost $300,000, have a four-year life, and
save $37,500 per year in cash operating costs. It would be depreciated
using the straight-line method. The tax rate is 40%.

Required:
a. Find the net investment required to replace the existing machine.
124,000
b. Compute the increase in annual net cash flows if the company replaces
the machine. 32,500

2. Warrenton Golf currently produces 200,000 cases of golf balls per year
at a variable cost of $9.75. Equipment is available for $500,000 that will
reduce variable costs by $2.25 per unit, while increasing cash fixed costs
by $200,000. The equipment will have no salvage value at the end of its
four-year life. Warrenton faces a 40% income tax rate and a 12% cutoff
rate.
Required:
1. Determine the NPV of the investment. 107,400

Fidsound has developed a new high-performance videotape. The

managers’ expectations appear below.
Annual volume 60,000 units for four years
Selling price $9
Unit variable cost $4
Cost of required machinery $300,000
Annual cash fixed costs $140,000
Increase in receivables $80,000
Increase in inventory $20,000
The increase in working capital will be returned in full at the end of the four
years. The tax rate is 40% and cost of capital is 12%.

Required:
Determine the NPV of the investment. 46,262

Fill in the blanks for each of the following independent cases. There are
no salvage values for the investments.
 PHINMA UNIVERSITY OF ILOILO
COLLEGE OF ACCOUNTANCY
FIN 072-FINANCIAL MARKETS

A. B C D E F G
CASE USEFUL CFAT INVESTM CUT-OFF IRR NPV PROFITAILITY
LIFE ENT REQUIRED INDEX
RATE OF
RETURN
1 15 40,000 245,680 12% 14% 26,77 1.109
9
2 8 110,00 448,470 16% 18% 29,37 1.065
0 0
3 10 80,000 361,600 12% 17.84 90,40 1.25
% 0