1. Heap Company is considering an investment in a project that will have a two year life. The project will provide a 10% internal rate of return, and is expected to have a P40,000 cash inflow the first year and a P50,000 cash inflow in the second year. What investment is required in the project? 2. The Habagat Inc. is planning to spend P600,000 for a machine that it will depreciate on a straight-line basis over a ten-year period with no disposal value. The machine will generate cash flow from operations of P120,000 a year. Ignoring income taxes, what is the accounting rate of return on the net initial investment? 3. Hop is considering the sale of a machine with a book value of P80,000 and 3 years remaining in its useful life. Straight-line depreciation of P25,000 annually is available. The machine has a current market value of P50,000. What is the cash flow from selling the machine if the tax rate is 40%? 4. Amcare is considering the sale of a machine with a book value of P160,000 and 3 years remaining in its useful life. Straight-line depreciation of P50,000 annually is available. The machine has a current market value of P200,000. What is the cash flow from selling the machine if the tax rate is 40%? 5. Craten Armored Car Co. is considering the acquisition of a new armored truck. The truck is expected to cost P300,000. The company's discount rate is 12 percent. The firm has determined that the truck generates a positive net present value of P17,022. However, the firm is uncertain as to whether it has determined a reasonable estimate of the salvage value of the truck. In computing the net present value, the company assumed that the truck would be salvaged at the end of the fifth year for P60,000. What expected salvage value for the truck would cause the investment to generate a net present value of P0? Ignore taxes. 6. BRGY Assembly, Inc. is considering the purchase of an automatic wire bonder which cost P750,000. It has a ten year life without any salvage value. BRGY would save P200,000 in labor costs annually as a result of the use of the new machine. Power cost would however increase P25,000 annually. The cost of capital is 16%. The present value factor for 10 years at 16% is 4.8332. The present value of the net annual cost savings is
7. Congener Beverage Corporation is considering an investment in a capital budgeting project that has an internal rate of return of 20%. The only cash outflow for this project is the initial investment. The project is estimated to have an 8 year life and no salvage value. Cash inflows from this project are expected to be P100,000 per year in each of the 8 years. Congener's discount rate is 16%. What is the net present value of this project? 8. The Able Company is considering buying a new donut maker. This machine will replace an old donut maker that still has a useful life of 2 years. The new machine will cost P2,500 a year to operate, as opposed to the old machine, which costs P2,700 per year to operate. Also, because of increased capacity, an additional 10,000 donuts a year can be produced. The company makes a contribution margin of P0.02 per donut. The old machine can be sold for P5,000 and the new machine costs P25,000. The incremental annual net cash inflows provided by the new machine would be: 9. Virginia Company invested in a four-year project. Virginia's discount rate is 10%. The cash inflows from this project are: Year Cash Inflow 1 P4,000 2 P4,400 3 P4,800 4 P5,200 Assuming a positive net present value of P1,000, what is the amount of the original investment? 10. Para Corporation is reviewing the following data relating to an energy saving investment proposal: Initial investment.................... P50,000 Life of the project................... 5 years Salvage value........................ P10,000 Annual cash savings.............. ? What annual cash savings would be needed in order to satisfy the company's 12% required rate of return? 11. The management of Elamin Corporation is considering the purchase of a machine that would cost P365,695 and would have a useful life of 9 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by P61,000 per year. The internal rate of return on the investment in the new machine is:
12. Boe Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 9 years. The company uses a discount rate of 10% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircraft, is -P439,527. Management is having difficulty estimating the salvage value of the aircraft. To the nearest whole peso how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive? 13. Trovato Corporation is considering a project that would require an investment of P48,000. No other cash outflows would be involved. The present value of the cash inflows would be P51,840. The profitability index of the project is: 14. The management of Lanzilotta Corporation is considering a project that would require an investment of P263,000 and would last for 8 years. The annual net operating income from the project would be P66,000, which includes depreciation of P31,000. The scrap value of the project's assets at the end of the project would be P15,000. The payback period of the project is closest to: 15. Jonette, Inc., is considering the purchase of a machine that would cost P240,000 and would last for 5 years, at the end of which, the machine would have a salvage value of P48,000. The machine would reduce labor and other costs by P62,000 per year. Additional working capital of P7,000 would be needed immediately, all of which would be recovered at the end of 5 years. The company requires a minimum pretax return of 17% on all investment projects. What is the net present value of the project? 16. The Rapp Company is considering buying a new machine which will require an initial outlay of P15,000. The company estimates that over the next four years this machine would save P6,000 per year in cash operating expenses. At the end of four years, the machine would have no salvage value. The company's required rate of return is 14%. What is the net present value of the project? The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for P90,000, it will cost P6,000 to transport to Moore’s plant and P9,000 to install. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of P5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling price of P500 and combined
materials and labor costs of P450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Moore has a marginal tax rate of 40%. 17. What is the net cash outflow at the beginning of the first year that Moore Corporation should use in a capital budgeting analysis? 18. What is the net cash flow for the third year that Moore Corporation should use in a capital budgeting analysis? 19. What is the net cash flow for the tenth year of the project that Moore Corporation should use in a capital budgeting analysis? Henderson Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks have a useful life of 8 years and cost a total of P500,000. Henderson expects its next increase in after-tax cash flow to be P150,000 in Year 1, P175,000 in Year 2, P125,000 in Year 3, and P100,000 in each of the remaining years. 20. Ignoring the time value of money, how long will it take Henderson to recover the amount of investment? 21. What is the payback reciprocal for the fleet of trucks? 22. Assume the net cash flow to be P130,000 a year. What is the payback time for the fleet of trucks? 23. The following data are available on a proposed investment project: Initial investment P142,500 Annual cash inflows P 30,000 Life of the investment 8 years Required rate of return 10% The internal rate of return, interpolated to the nearest hundredth of a percent, would be: 24. Overland Company has gathered the following data on a proposed investment project:
Investment in depreciable equipment Annual cash flows Life of the equipment Salvage value Discount rate The internal rate of return on this investment is:
P150,000 P 40,000 10 years -010%
Fordem Co. is considering an investment in a machine that would reduce annual labor costs by P30,000. The machine has an expected life of 10 years with no salvage value. The machine would be depreciated according to the straight-line method over its useful life. The company's marginal tax rate is 30 percent. 25. Assume that the company will invest in the machine if it generates an internal rate of return of 16 percent. What is the maximum amount the company can pay for the machine and still meet the internal rate of return criterion? 26. Assume the company pays P250,000 for the machine. What is the expected internal rate of return on the machine?
27. Two projects being considered are mutually exclusive and have the following projected cash flows: Year Project A Cash Flow Project B Cash Flow 0 -P50,000 -P50,000 1 15,625 0 2 15,625 0 3 15,625 0 4 15,625 0 5 15,625 99,500 If the required rate of return on these projects is 10 percent, which would be chosen and why?
