CAPITAL BUDGETING

1 G Company has the opportunity to invest in a two-year project that is expected to produce cash flows from operations, net of income taxes, of P100,000 in the first year and P200,000 in the second year. G has a required rate of return of 20%. For this project, G should be willing to invest immediately a maximum of A. P283,300 C. P222, 100 B. P249,900 D. P208,200* 2. H Company invested in a two-year project having an internal rate of return of 12%. The project is expected to produce cash flows from operations of P60,000 in the first year and P70,000 in the second year. The cost of the project is closest to A. P103,600 C. P116, 100 B. P109,400 D. P122,500* Questions 3 through 5 are based on the following information. VF owns a small van that is used in floral deliveries. The van is in need of immediate repairs. Alternatively, the company could buy a new van to replace the old one. Data concerning these alternatives follow: Old van New van Purchase cost when new P9,000 P15,000 Remaining residual value 3,000 Annual cash outflows for operating costs 6,000 4,500 Salvage value five years from now 500 3,000 Salvage value now 4,000 Major repair now 3,000If the new van is purchased, the old van would be sold now. VF would use the new van for five years before replacing it. If the old van is not replaced, it will also. be used for five years. Depreciation is computed on a straight-line basrs. The required rate of return is 14%. Answer the questions from the viewpoint of buying the new van instead of repairing the old van. 3. The present value of the difference in salvage value in five years would be' A. P1.557.00 C. P129750 B. P1.816.50 D. P1.190.00* 4. The present value of the savings in annue' cauh outflows for operating costs if the new van is purchased would be A. P7,500.00 . C. 920,508.00 B. P014050 D. i 15.44850" _5. The incremental net present value in'_favor of buying the new van is A. P(1.552) _ . C. P028) B. P3553 D. P1029" . 6. M is considering the following 5 independent cases: Required Amount Project of Capital [RR A P300000 25.35% B 500,000 23.22% C_ 400000 19.10% D 550000 9.25% E 650000 ' 8.50% The company has a target capital structure which is 40% debt and 60% equity. The. company can issue bonds with a yield to maturity of- 10%. The company has P900000 in retained earnings, and the current stock price is P40 per share. The flotation costs associated with issuing new equity are P2 per share. M's earnings are expected to continue to grow at 5% per year. Next year's dividend if forecasted to be P250. The firm faces a 40% tax rate. What is the size of Ms capital budget? A. P1200000 C. P1400000 B. P1350000 D. P 800000" 7. For. the next 2 years, a lease is estimated to have an operating net cash inow of P7500 per annum, before adjusting for P0000 .per annum tax basis lease amortization. and 40% tax rate. The present value of an ordinary annuity of P1 per 'year at 10% for 2 years is 1.74. What is the lease's after-tax present value using a 10% discount factor? ' A. P4350 C. P2610 B. P11,310 D. P0570\" 8. 10. 11. 12. Tour company will enter into a, lease arrangement for a piece of production equipment The lease will have a 5-year term and will be non cancelable Payments of P5 350 will be required at the beginning of each _.year Executory costs are P250 per year and are included in the lease payments. The equipment could be purchased outright today for P20 000. It is expected to have a zero salvage value at the end of the lease term. Your company\" s marginal tax rate is 34% the after-tax cost of leasing this asset is nearest; A. 4.76% _C. 11.36% B. 9.24% ' D. 7.00%" Questions 9 and 10 are based on the following information D is a tax- exempt entity, plans to purchase a new machine which they project to depreciate over a ten year period without salvage value. T he new machine will cost P200. 000 and is expected to generate cash savingsn of P60 000 per year in operating costs D 5 cost of capital 5 1.0%. ,For ten periods at 10%, present value'of Pi is 0.3220, while the present _ value of an ordinary annuity of P1 is 5.65. What is the net present value of the proposed investment assuming D uses a 12% discount rate? A. P185540 _ C. P139000 B. P 69,980 ' D. P140000" With the company's initial investment on the new machine, the accounting rate'of return is A. 15% c. 25% B. 20% D. 30%" Given the following data: Present investment required P10,000 Net present value P1300 Annual cost savings ".7 Discount rate . 14% Life of the project 8 years- Based on the above given, the annual cost savings would be A. P4024 C. P1.875 B- P1436 D. P3,?04" What happens to the NPV of a 1-year project if fixed costs are increased from P500 to P600. the rm is protable, has a 35% tax rate and employs a 12% cost of capital? A. NPV decreases by P100.00 C. NPV decreases by P6500 B. NPV decreases by P8929 D. NPV decreases by. P58.04*