A. Payback Bailout. In conventional payback period computations, investment salvage value is usually ignored. An approach which incorporates the salvage value in payback is the "Bail-out period". This is reached when the cumulative cash earnings (cash inflows) plus the salvage value at the end of particular year equals the original investment.

An equipment costing P180,000 expected to have the following net cash inflows and scrap values:

Year. Net Cash Inflow. Salvage Value, end of year

1 P 36,000 P 90,000

2 54,000 60,000

3 60,000 30,000

4 48,000 6,000

Determine the payback bail-out period.

B. Payback Bailout. An investment of P150,000 is expected to produce annual cash earnings (inflows) of P50,000 for 5 years. Its estimated salvage value is P70,000 during the first year and this is expected to decrease by P15,000 annually. Determine the payback bail-out period.

C. Captain Barbel Co. is considering an investment with a cash flow after tax of P20,000 in 2014, P30,000 in 2015 and P15,000 of Year 2016. Considering the cash flow pattern, the payback bailout period is expected to be 2.5 years. Salvage value at the end of 2015 is P35,000 and at the end of 2016 is P26,000. The firm's discount rate is 13%. What is the expected net investment?

D. Accounting Rate of Return or Simple Rate of Return. The Ponce company is considering an investment in a machine which will cost P30,000 with an estimated useful life of four years. Annual net income after deducting depreciation and income taxes are projected as follows:

Year. Net Income

1 P4,000

2 6,000

3 10,000

4 10,000

Required: Compute the accounting rate of return based on:

a.Initial Investment

b.Average investment, assuming the machine has no salvage value.

c.Average investment, assuming the machine has a salvage value of P4,000 at the end of its four-year life.

E. Accounting Rate of Return. The Elizalde Company is considering the addition of a new product line which will require an investment of P50,000 with no scrap value. The investment is to be amortized over a ten-year period during which annual net cash inflows before income taxes of P10,000 are expected. The income tax rate is 30%.

Required:

a.Determine the annual net income for the purpose of computing the accounting rate of return.

b.Compute the annual rate of return.