Investment appraisal
1. Payback Period Net Investment Annual cash returns Assume the following cash inows for two alternative investment proposals: Proposal A B Net investment in equipment Php 300,000 Php 600,000 Annual cash returns: Years 1 to 3 150,000 150,000 Years 4 to 5 200,000 Salvage value at the end of useful life 30,000 30,000 Economic life 6 years 10 years Required: Determine the payback period of the two proposals. As nancial manager, what would investment proposal would you recommend. 2. Bail-out Period An investment of P700, 000 is expected to produce annual cash earnings of 150,000 for 12 years. Its estimated salvage value is P100, 000 during the rst year and this is expected to decrease by P12, 000 annually. Required: What is the hailout payback period? 3. Accounting Rate of Return '. AAR = Average Annual Net Income Investment If cost reduction project is involved: AAR = Cost savings Depreciation on new equipment Assume: Initial investment required Php 200,000 Estimated useful life 40 years Annual cash inows Php 24,000 Salvage value at the end of useful life Php 4,000 Straight-line depreciation will be used. Required: Compute the ARR a. Based on initial investment 13. Based on average investment b. Uneven cash inflows A new equipment costing Php 5,600,000 with Php 200,000 salvage value at the end of five years is expected to bring in the following cash inflows, net of tax. Year 1 Php 2,400,000 Year 2 1,900,000 Year 3 1,600,000 Year 4 1,200,000 Year 5 1,000,000 Required: Compute the IRR. 6. Present Value Payback Period (Discounted Payback Period) A project requiring an investment of Php 340,000 is expected to generate the following cash inflows: Year Amount Php 120,000 120,000 120,000 CT AWN 120,000 120,000 If the cost of capital is 15%, what is its discounted payback period? 7. Profitability Index Profitability index = PV of Cash Inflows PV of Net Investment Jade Inc. has Php 400,000 funds available for investment. It is considering the following projects: A B C Present Value of Annual Cash Php 500,000 P400,000 P300,000 Inflows Less: Investment required 400,000 250,000 100,000 Net Present Value 100,000 150,000 200,000 Required: 1. Compute the profitability index of each project. 2. Rank each project on the basis of the present value index. 3. Which project (s) should be undertaken?4. Net Present Value , Present value of cash inows computed based 0n minimum desired discount rate P XX Less: Present value of investment XX Net Present Value P XX (1.. Uniform Cash Inows Team Lalcay Gym wants to invest in an additional sports equipment. The machine costs Php 160, 000 with a useful life of twelve years and no salvage value. The machine will be depreciated using the straight line method and is expected to produce annual cash inow from operations, net of income taxes, of Php 44,000. The present value of an ordinary annuity of P1 for six periods at 10% is 4.355. The present value of P1 for six periods at 10% is 0.564. Assuming that Team Lakay Gym wants a minimum rate of return of 10%, what is the net present value of this proposed investment? Is the proposal acceptable? It. Uneven Cosh Inows Emerald Inc. plans to invest in a four-year project that will cost Php 150, 000. The company's cost of capital is 8%. Additional information on the project is as follows: Year Cash Flow from Operations, net of taxes Present Value of P1 at 8% 1 Php 20,000 0.926 2 22,000 0.35? 3 24,000 0.794 4 26,000 0.735 Required: Using the NPV method, determine whether the project is acceptable or not. 5. Discounted Cash Flow Rate of Return i _ Even Net Cash Inows Uneven Net Cash Inows PVFA - Cost of investment PVFA - Cost of investment Average net cash inows Net cash inows 1:. Even Cosh Inows Amoree company has the opportunity to buy a new equipment at Php 2 million. The machine is estimated to have a useful life of 8 years, no salvage value and will yield an annual net cash inow after tax of Php 750, 000 during its economic life. The company's rate of return is 14%. Required: Determine the IRR
