CAPITAL BUDGETING
In capital budgeting decisions, the following items are considered among others: 1. Cash outflow for the investment. 2. Increase in working capital requirement. 3. Profit on sale of old asset 4. Loss- on write-off of oid asset For which of the above items would taxes be relevant? A. Items 1 and 3 only. C. All items B. Items 3 and 4 only D. Items 1 3 and 4 only.* Assume that the interest rate is greater than zero. Which of the following cash-inflow streams should you prefer? Year 1 Year 2 Year 3 Year 4 P400 P300 P200 P100 P100 P200 P300 P400 P250 P250 P250 Any of these. since they each sum to P1,000* 3 Volcano, inc. is planning to purchase a new machine that will take six years to recover the cost The new machine is expected to produce cash flow from operation net of income taxes, of P4,500 a year for the first three years of the payback period and P3,500 a year of the last three years of the payback period. Depreciation of P3.000 a year shall be charged to income of the six years of the payback period How much shall the machine cost? A P12.000 C. P24,000 B P13 000 D. none of these* Great Value Company is planning to purchase a new machine costing P50,000 with freight and installation costs amour ting to P1,500. The old unit is to be traded-in will be given a trade-in allowance of P7,500. Other assets that are to be retired as a result of the acquisition of the new machine can be salvaged and sold for P3.000 The loss on retirement of these other asset is P1,000 which will be reduced income taves of P400 If the new equipment is not purchased, repair of the old unit will have to be made at an estimated cost of P4.000. This cost can be avoided by purchasing the new equipment Additional gross working capital of P12,000 will be needed to support operation planned with the new equipment. The net investment assigned to the new machine for decision analysis is A. P50.200 C. P53,600 B P52.500 D. P57.603.C Company is planning to invest in a machine with a useful life of five years and not salvage value. The machine is expected to produce cash flow from operations of P20,000 in each of the five years. C's required rate of return is 10%. The maximum price that the company would pay for the machine would be A. P32,220 C. P75,820 B. P62, 100 D. P66,667* 5 . D. inc., purchased a new machine for P60,000 on January 1. The machine is being depreciated on the straight-line basis over five years with no salvage value. The simple rate of return is expected to be 15% on the initial investment. Assuming a uniform cash flow, this investment is expected to provide annual cash flow from operations of A. P7,200 C. P13,800 B. P12,000 D. P21,000* 7. JKL Company is considering replacing a machine with a book value of P100,000, a remaining useful life of 4 years, and annual straight line depreciation of P25,000. The existing machine has a current market value of P80,000. The replacement machine would cost of P160.000, have a 4-year useful life, save P50.000 per year in cash operating costs. If the replacement machine would be depreciated using the straight-line method and the tax rate is 40% what would be the increase in annual income taxes if the company replaces the machine? A. P21.000 C. P32,000 B. P14,000 D. P20,000* 8. Lyben Inc. is planning to produce a new product. To do this, it is necessary to acquire a new equipment that will cost the company P100,000 The estimated life of the new equipment is five years with no salvage value. The estimated income and costs based on expected sales of 10,000 units per year are: Sales @ P10.00 per unit P100.900 Costs @ P8.00 per unit 80.GO0 Net income P 20,060 The accounting rate of return based on initial investment of P100,000 i' management decrease its selling price of the new product by 10%? A. 5% C 15% B. 10% D. 20%* 9. The Z Company is considering an investment that has the following data (in pesos): Year 1 2 3 5 investment 8,000 3,000 Cash inflows 2,000 2,000 5,000 4,000 4,000 The payback period for this investment is A. 3.5 years C. 4 years B. 1.5 years D. 4.5 years*Questions 10 and 11 are based on the following information: L Company is planning to buy a coin-operated machine costing P40,000. This machine will be depreciated over a five-year period using the straight-line method and has no salvage value. L estimates that this machine will yield an annual net operating income P12,000. L's desired rate of return on its investments is 12%. 10. L's simple rate of return on its initial investment in this machine is expected to be A. 30% C. 12% B. 15% D. 10%* 11. L's expected payback period for its investment in this machine is A. 2,0 years C. 5.0 years B. 3.0 years D. 3.3 years* 12. At the start of the year and St. Tropez Co. plans to replace its oid sing-along equipment.. These information are available: Old New Equipment P 70,000 P 120,000 Current salvage value 10,000 Salvage value, end of useful life 2,000 16,000 Annual operating cost 56,000 38,000 Accumulated depreciation 55,300 Estimated useful life 10 years 10 years The company's income tax rate is 35% and its cost of capital is 12%. What is the present value of all the relevant cash flows at time zero? A. (P54,000) C. (P120,000) B. (P110,000) D. (P124,700)*
