SUCCEED REVIEW CENTER CAPITAL BUDGETING
M. B. GUIA
Practice Problems:
Problem 1 (Cash flos!" The Ch#ef $#%a%al 'ff#&er of Pa%a I%&. has re)*es+e, a% e-al*a+#o% of a roose, a&)*#s#+#o% of a %e ma&h#%e a+ a *r&hase r#&e of P /0000 a%, #+h #%s+alla+#o% &os+s of P 10000. A P2000 P2000 #%&rease #% or3#%4 &a#+al #ll be re)*#re,. The &oma% has a% ol, ma&h#%e +ha+ has a boo3 -al*e of P 5000 a%, &a% be sol, for P 6000. The %e ma&h#%e #ll ha-e a *sef*l l#fe of fo*r ears af+er h#&h #+ &a% be sol, for P 10000. The es+#ma+e, a%%*al #%&reme%+al oera+#%4 re-e%*es a%, &ash oera+#%4 e7e%ses a re P 150000 a%, P 100000 rese&+#-el rese&+#-el for ea&h of +he fo*r ears. Pa%a8s effe&+#-e #%&ome +a7 ra+e #s 90: a%, +he &os+ of &a#+al #s 1;:. Pa%a *ses s+ra#4h+ e)*#me%+>s s (a! aba&3 aba&3 er#o,? er#o,? (b! aba& aba&3 3 rero&a rero&al? l? ;. Ass*m#%4 +ha+ #%s+ea, of +he a%%*al %e+ a%%*al &ash #%flos #%flos of P 2000 +he &oma% #s #s e7e&+#%4 +he +he follo#%4 a%%*al &ash #%flo (af+er +a7!? Per#o, Amo*%+ 1 P ;500 ; 2500 2 5000 9 2000 5 /000 2. I% rela+#o% +o #+em ; ; ha+ #s #s +he &oma%>s &oma%>s ba#ls >s %e+ rese%+ rese%+ -al*e ass*m#% ass*m#%4 4 +ha+ +he &oma%>s &oma%>s &os+ &os+ of &a#+al #s 10: a%, +he rese%+ rese%+ -al*e of 1 for 5 er#o, #s ./;0@ a%, +he rese%+ -al*e of a% a%%*#+ of 1 for 5 er#o,s #s 2.6@0? 6. Wha+ #s +he +he e)*#me%+>s #%+er%al ra+e ra+e of re+*r% &o%s#,er#%4 +he follo#%4 ra+es ra+es a%, +he#r rese&+#-e rese%+ rese%+ -al*e fa&+ors? N @: 10: 11: 5 2.@ 2.0 2./0 . Wha+ #s +he +he e)*#me e)*#me%+>s %+>s rof#+ab#l rof#+ab#l#+ #+ #%,e7? #%,e7? Pra&+#&e *#er" I+ems 1 +o 5 are base, o% +he follo#%4 #%forma+#o%" o* o* are +he ma%a4eme%+ a,-#ser of +he Mas*4#, Coma% a ma%a4eme%+ &oma%. I+ #s rese%+l &o%s#,er#%4 +he *++#%4 #% of &er+a#% &o%&ess#o%s #% +he ma#% lobb of a% off#&e b*#l,#%4 h#&h #+ ma%a4es. o*r o*r s+*, bro*4h+ o*+ +he follo#%4 es+#ma+es o% a% a-era4e a%%*al bas#s" Salar#es P 6000 L#&e%ses a%, Ta7es ;00 Cos+ of Mer&ha%,#se Sol, 90000 Share of a#r &o%,#+#o%#%4 a%, l#4h+ 500 Pro ra+a b*#l,#%4 ,erea+#o% 1000 Co%&ess#o% a,-er+#s#%4 100 Share of &oma% a,m#%#s+ra+#-e &os+s 900 Sale of mer&ha%,#se 9@000 The #%-es+me%+ #% e)*#me%+ h#&h o*l, las+ 10 ears (%o sal-a4e -al*e! o*l, be P 5000. As a% al+er%a+#-e a &a+er#%4 &oma% has offere, +o lease +he sa&e for P650 er ear for 10 ears a%, *+ #% a%, oera+e +he same &o%&ess#o%s a+ %o &os+ +o +he Mas*4#, Coma%. A#r A#r &o%,#+#o%#%4 a%, l#4h+ are +o be f*r%#she, b +he off#&e b*#l,#%4 a+ %o a,,#+#o%al &har4e. I% form*la+#%4 o*r a,-#&e +o +he ma%a4eme%+ of +he &oma% o* ,e+erm#%e, +ha+" 1. The a%%*al a%%*al &ash flo h#&h h#&h o* &o%s#,er &o%s#,er +he #%&reme%+ #%&reme%+al al a,-a%+a4e a,-a%+a4e #% +he o%ersh# o%ersh# al+er%a+ al+er%a+#-e #-e #s a. P1600 b. P650 &. P1@00 ,. P @000 ;. Us#%4 Us#%4 +he rese%+ rese%+ -al*e -al*e +able for 10 ears ears (+he er#o, er#o, of +he +he lease offer! offer! a%, 10: 10: +he #el, #el, of al+er%a+ al+er%a+#-e #-e oor+*%#+#es for +h#s ro=e&+ (4#-e% +ha+ P.V. P.V. fa&+ors fa&+ors for ears 0 +o 10 .@0@ .651 ./2 ./;1 .5/9 .512 .9/6. .9;9. a%, .2/! +he rese%+ -al*e of +he lease al+er%a+#-e #s a. P 9/0@ b. P 5995 &. P650 ,. P1600 2. The +o+al +o+al of +he +he &os+s &os+s #rrele-a #rrele-a%+ %+ +o +he ,es# ,es#o% o% #s a. P @000 b. P 1000 &. P@00 ,. No%e of +he abo-e 9. The %e+ %e+ rese%+ rese%+ -al*e -al*e of +he +he o%ersh o%ersh# # al+er%a al+er%a+#-e +#-e #s
a. P @000 b. P 1000 &. P5995 ,. P 9/0@ The +o+al of +he er+#%e%+ &os+s +ha+ e%+ere, o* &ash flo &o%s#,era+#o%s #s a. P 9/0@ b. P 9@;00 &. P 96200 ,. P @;00 /. Lbe% I%&. #s la%%#%4 +o ro,*&e a %e ro,*&+. To ,o +h#s #+ #s %e&essar +o a&)*#re +o a&)*#re a %e e)*#me%+ +ha+ #ll &os+ +he &oma% P 100000. The es+#ma+e, l#fe of +he %e e)*#me%+ #s f#-e ears #+h %o sal-a4e -al*e. The es+#ma+e, #%&ome a%, &os+s base, o% e7e&+e, sales of 10000 *%#+s er ear are Sales a+ P10.00 er *%#+ P 100000 Cos+s a+ P.00 er *%#+ 0000 Ne+ I%&ome ;0000 The a&&o*%+#%4 ra+e of re+*r% s base, o% #%#+#al #%-es+me%+ #s ;0:. Wha+ #ll be +he a&&o*%+ ra+e of re+*r% o% #%#+#al #%-es+me%+ of P 100000 #f ma%a4eme%+ ,e&rease #+s sell#%4 r#&e for +h#s %e ro,*&+ b 10:. a. P5: b. 10: &. 15: ,. ;0: I+ems 6 a%, are base, o% +he follo#%4 #%forma+#o%" ABC Ma%*fa&+*r#%4 Coma% #s +a3#%4 #%+o a&&o*%+ +o al+er%a+#-e s+ra+e4#es +o mar3e+ a %e ro,*&+. T# ma3e 3%o% +he ro,*&+ #ll %e&ess#+a+e a% o*+la of P 65000. W#+h a lo r#&e +he ro,*&+ #ll 4e%era+e &ash ro&ee,s of P 50000 er ear a%, #ll ha-e a l#fe of +o ears. W#+h a h#4h r#&e +he ro,*&+ #ll 4e%era+e &ash ro&ee,s of P @0000 b*+ #ll ha-e a l#fe of o%l o%e ear. The &os+ of mo%e for +he &oma% #s 10:. The follo#%4 #s +he +able of rese%+ -al*e of 10:. Prese%+ Val*e of a% Prese%+ Val*e of P1 A%%*#+ of P1 1 .@0@1 1 0.@0@1 ; .;/9 ; 1.6255 2 .6512 2 ;.9/@ 9 ./20 9 2.1/@@ 5 ./;0@ 5 2.6@0 6. The %e+ rese%+ -al*e of +he lo r#&e ro,*&+ s+ra+e4 #s a. P 11665 b. P ;5000 &. P 65000 ,. P 165000 . The %e+ rese%+ -al*e of +he h#4h r#&e ro,*&+ s+ra+e4 #s a. P/1@ b. P 1529; &. P /5000 ,. P 1/5000 I+ems @ a%, 10 are base, o% +he follo#%4 #%forma+#o%" Da%e&ho Corora+#o% a +a7s &os+ of &a#+al #s 1;:. Per +e% er#o,s of 1;: +he rese%+ -al*e of P1 #s 0.2;;0 h#le +he rese%+ -al*e of a% or,#%ar a%%*#+ of P1 #s 5./50 @. Wha+ #s +he %e+ rese%+ -al*e of +he roose, #%-es+me%+ ass*m#%4 Da%e&ho *ses a 1;: ,#s&o*%+ ra+e? a. P 1//90 b. P /@@0 &. P 12@000 ,. No%e of +he abo-e 10. W#+h +he &oma%>s #%#+#al #%-es+me%+ o% +he %e ma&h#%e +he a&&o*%+#%4 ra+e of re+*r% #s? a. 15: b. ;0: &. ;5: ,. No%e of +he abo-e I+ems 11 +o 19 are base, o% +he follo#%4 #%forma+#o%" S+a. L*a Coma% #s &o%s#,er#%4 +he *r&hase of a %e e)*#me%+ a+ a r#&e of P 900000. If +he %e e)*#me%+ #s a&)*#re, a% ol, ma&h#%e +ha+ #s f*ll ,erea+e, #ll be ,#sose, for P 50000. The %e e)*#me%+ #s e7e&+e, +o ro-#,e a%%*al sa-#%4s #% oera+#%4 &os+s of P 150000 before ,e,*&+#%4 ,erea+#o% or #%&ome +a7. The %e e)*#me%+ has a% es+#ma+e, l#fe of 5 ears a%, #ll ha-e %o sal-a4e -al*e a+ +he e%, of 5 ears. I%&ome +a7 #s a+ +he ra+e of 25: for bo+h +he or,#%ar #%&ome a%, o% a% 4a#% from +he sale of e)*#me%+. $or s#m#lar +e of #%-es+me%+ +he &oma% e7e&+s a m#%#m*m ra+e of re+*r% of ;0:. The aror#a+e rese%+ -al*e +able +ha+ o* ma *se #% +h#s roblem #s as follos" Prese%+ Val*e of a% A%%*#+ of Prese%+ Val*e of P1 P1 ;0: ;;: ;0: ;;: 1 .22 .;0 1 .22 .;0 ; ./@9 ./6; ; 1.5; 1.9@; 2 .56@ .551 2 ;.10/ ;.09; 9 .9; .951 9 ;.5@ ;.9@9 5 .90; .260 5 ;.@@1 ;./9 11. The amo*%+ of %e+ #%-es+me%+ #% +he %e e)*#me%+ #s a. P 250000 b. P 2/6500 &. P 900000 ,. P 950000 1;. The aba&3 er#o, *s#%4 re+*r%s before ,erea+#o% a%, +a7es #s a. P ;.95 ears b. ;./6 ears &. 2.0 ears ,. 9.0 ears 12. The %e+ rese%+ -al*e of +he #%-es+me%+ o% +he %e e)*#me%+ #s a. P ero b. P 660.50 &. P ;560 ,. P (;9/20! 19. The ,#s&o*%+e, ra+e of re+*r% o% +he %e e)*#me%+ #s a. ;0: &. less +ha% ;0: b. more +ha% ;0: b*+ less +ha% ;;: ,. ;;: I+ems 15 a%, 1/ are base, o% +he follo#%4 #%forma+#o%" Ca+lea Coma% a +a7 e7em+ e%+#+ #s la%%#%4 +o *r&hase a %e ma&h#%e #+ #ll ,erea+e o% a s+ra#4h+ l#%e bas#s o-er a +e% er#o, #+h %o sal-a4e -al*e. The %e e)*#me%+ &os+#%4 P 150000 #s e7e&+e, +o ro,*&e &ash sa-#%4s of P 22000 er ear #% oera+#%4 &os+s. Ca+lea>s &os+ of &a#+al #s 1/:. $or +e% er#o,s a+ 1/: +he rese%+ -al*e of P1 #s 0.;;6 h#le +he rese%+ -al*e of a% a%%*#+ of P1 #s 9.22. 15. Ass*m#%4 +ha+ Ca+lea *ses a ,#s&o*%+ ra+e of 1/: +he %e+ rese%+ -al*e of +he roose, #%-es+me%+ #s" a. P @9@ b. P 29050 &. P 65000 ,. P 10000 1/. Base, o% +he Coma%>s #%#+#al #%-es+me%+ #% +he %e e)*#me%+ +he a&&o*%+#%4 ra+e of re+*r% #s a. : b. 1;: &. 1/: ,. ;5: I+ems 16 +o 1@ are base, o% +he follo#%4 #%forma+#o%" Ber%#e Co. #s e-al*a+#%4 ; al+er%a+#-e #%-es+me%+ oor+*%#+#es. All &a#+al #%-es+me%+ #% +h#s &oma% are e7e&+e, +o #el, a ,#s&o*%+ ra+e of re+*r% of less +ha% 1;:. The follo#%4 ,a+a o% +he ; #%-es+me%+ roosals are" 5.
Proosal M Proosal N Re)*#re, #%-es+me%+ P 990000 P 90000 Es+#ma+e, ser-#&e l#fe 5 ears / ears Es+#ma+e, sal-a4e -al*e P ;0000 << Es+#ma+e, a%%*al &ash flo 160000 P 1;0000 Derea+#o% s+ra#4h+
20. If ma&h#%e &os+s P 5000 a%, #ll 4e%era+e a%%*al &ash #%flos of P 1000 for +he %e7+ ears ha+ #s +he aba&3 er#o,? a. ears b. 5 ears &. / ears ,. 2 ears 21. Wha+ #s +he aba&3 rero&al #% +he re-#o*s )*es+#o%? a. 1;5: b. 15: &. ;0: ,. 22: 2;. $r#e%,l Cor.>s Pro=e&+ S3 has a %e+ #%-es+me%+ of P1.; m#ll#o%. The %e+ rese%+ -al*e of all f*+*re %e+ &ash #%flos #s P;.9 m#ll#o%. The &oma%>s +a7 ra+e #s 90:. The rof#+ab#l#+ #%,e7 #s a. 0.50 b. 1.;0 &. 0.2 ,. ;.00 22. A &a#+al b*,4e+#%4 ,es#o% mo,el has ro-#,e, +he follo#%4 #%forma+#o%" Proosal A Proosal B I%-es+me%+ P 1000000 I%-es+me%+ P 100000 Prof#+ab#l#+ #%,e7 1.; Prof#+ab#l#+ #%,e7 ;.1 Ne+ Prese%+ Val*e P /00000 Ne+ Prese%+ Val*e P 200000 The bes+ ro=e&+ #s a. Proosal A be&a*se #+ has +he h#4hes+ %e+ rese%+ -al*e. b. Proosal B be&a*se #+ has +he h#4hes+ rof#+ab#l#+ #%,e7 &. Proosal B be&a*se #+s rof#+ab#l#+ #%,e7 #s o-er ;.0 ,. Proosal A be&a*se #+ has +he h#4hes+ %e+ rese%+ -al*e e-e% +ho*4h #+s #%-es+me%+ base #s smaller 29. I%forma+#o% o% +hree (2! #%-es+me%+s ro=e&+s #s 4#-e% belo" Pro=e&+ I%-es+me%+ Re)*#re, Ne+ Prese%+ Val*e H P150000 P29005 G 100000 ;;/60 W /0000 12/0; Ra%3 +he ro=e&+s #% +erms of refere%&e *s#%4 +he rof#+ab#l#+ #%,e7" a. 1s+ W ;%, G 2r, H &. 1s+ G ;%, G 2r, W b. 1s+ G ;%, W 2r, H ,. The ra%3#%4 #s +he same.