09 Capital Budgeting KEY PDF

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Summary

I TRUE OR FALSE1 TRUE 21 TRUE 41 TRUE2 FALSE 22 FALSE 42 TRUE3 TRUE 23 FALSE 43 TRUE4 FALSE 24 FALSE 44 FALSE5 TRUE 25 TRUE 45 TRUE6 TRUE 26 TRUE 46 FALSE7 TRUE 27 FALSE 47 TRUE8 FALSE 28 TRUE 48 FALSE9 FALSE 29 TRUE 49 FALSE10 TRUE 30 FALSE 50 FALSE11 FALSE 31 FALSE 51 TRUE12 TRUE 32 TRUE 52 FALSE1...

Description

Chapter 9 Capital Budgeting - Key I

TRUE OR FALSE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

II 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

TRUE FALSE TRUE FALSE TRUE TRUE TRUE FALSE FALSE TRUE FALSE TRUE FALSE TRUE FALSE TRUE TRUE TRUE TRUE FALSE

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

TRUE FALSE FALSE FALSE TRUE TRUE FALSE TRUE TRUE FALSE FALSE TRUE FALSE TRUE FALSE TRUE FALSE TRUE FALSE FALSE

MULTIPLE CHOICE QUESTIONS A 16 B B 17 D D 18 C C 19 D B 20 D A 21 B C 22 D A 23 D C 24 C B 25 B D 26 D D 27 D C 28 A C 29 D B 30 B

41 42 43 44 45 46 47 48 49 50 51 52

31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

TRUE TRUE TRUE FALSE TRUE FALSE TRUE FALSE FALSE FALSE TRUE FALSE

B C D C C C A D B A B A D C C

MULTIPLE CHOICE PROBLEMS 1 C 13 2 B 14 3 B 15 4 D 16 5 C 17 6 B 18 7 B 19 8 D 20 9 D 21 10 B 22 11 B 23 12 C 24

C B C B C C B C D B C A

25 26 27 28 29 30 31 32 33 34 35 36

C D B C B C B A B C B A

SOLUTIONS TO MULTIPLE CHOICE PROBLEMS #1

investment recovered

year at y-0

unrecovered 105,000.00 50,000.00 55,000.00 45,000.00 10,000.00 10,000.00 -

1 2 3

years recovered 1 1 0.25 (P10,000 / P40,000) = .25 2.25 payback

or 2 years

#2

#3

#4

+

(P105,000 - P95,000) P 40,000

= 2.25 years

Average Net income = P95,000 / 5 years = P19,000 ARR = P19,000 / P105,000 =

Total present values of cash inflows year PV CASH FACTOR FLOWS 1 0.81 50,000.00 2 0.65 45,000.00 3 0.52 40,000.00 4 0.42 35,000.00 5 0.34 30,000.00 Total present values of cash inflows Initial investment cost Net present value Present value = P56,000 x 2.531 = Initial investment cost Net present value

18.095 or 18.10%

PRESENT VALUES 40,500.00 29,250.00 20,800.00 14,700.00 10,200.00 115,450.00 105,000.00 10,450.00 141,736.00 140,000.00 1,736.00

#5

Present value Initial investment Profitability index

20,000.00

x 2.531

50,620.00 50,000.00 1.01

P50,620 / P50,000

#6

PV Factor = Investment / Annual cash flows = P68,337 / P27,000 = 2.531 2.531 is at 9%

#7

Present value = P30,000 x 2.487 =

#8

Payback period = P400,000 / P100,000 =

#9

Present values = Initial investment = Net present value

#10

Accounting Rate of Return (ARR) = P20,000 / (410,000 / 2) =

#11

PV Factor = P600,000 / P142,000 =

74,610.00 4 years

P142,000 x 4.355 =

618,410.00 600,000.00 18,410.00

0.42254 approximately 11%

between 4.1111 and 4.3555 #12

#13

P20000 / P200,000 =

Revenues Operating costs 38,000.00 Depreciation P320,000 / 8 years 40,000.00 Annual net income ARR = P12,000 / (P320,000 / 2) =

78,000.00 12,000.00 0.0750

Net income Depreciation expense Annual cash flows

12,000.00 40,000.00 52,000.00

Payback

90,000.00

P320,000 / P52,000 =

0.6154 or 6.2 years

#14

ARR = Net income / Average investments =

= 30%

P60,000 (P300,000 + P100,000) / 2

#15 #16

#17

#18

Average investment =

42,000.00

(P80,000 + P4,000 ) / 2 =

year PV Factor at 15% 1 0.8700 2 0.7560 Total PV of cash inflows

x x

Cash Flows 100,000.00 160,000.00

year PV Factor at 14% 1 0.8800 2 0.7700 3 0.6700 Total PV of cash inflows

x x x

Cash Flows 15,000.00 15,000.00 10,000.00

Payback = P200,000 / P40,000 =

=

=

Present Values 87,000.00 120,960.00 207,960.00 Present Values 13,200.00 11,550.00 6,700.00 31,450.00 5.00 years

10%

88,683.00

#19

PV of P1 at 12% = P24,600 x 3.605 =

#20

Payback = P600,000 / P225,000 =

#21

Present value factor = P30,000 / P7,300 = 4.1095 4.231 and 4.111 in between is 4.1095 is at 12%

2.6667 years

4.2310 0.12150 4.1095 in between 4.1110 (0.0015) #22

#23

Present value = Initial investment Net present value

P7,300 x 4.355 at 10%

Profitability index =

P31,792 / P30,000 =

#25

Savings on labor less, increased in power costs net savings PV of 12% for 10yrs PV of savings Less ,Investment costs Net present value

#26

Investment / annual cash flow = Factor of Time Adjusted Rate Of Return

#24

1,792.00

1.0597

1.06

x = =

8,000.00 (1,000.00) 7,000.00 5.65 39,550.00 30,000.00 9,550.00

14%

P84,900 / P15,000 = 5.660 this is in Table 4 14% 12 years #27

31,791.50 30,000.00 1,791.50

Return in five (5) years factor for 12% for 5 yrs at Table 3

10,000.00 0.5670 5,670.00

PV and the maximum amount that the company would be willing to invest.

#28 years a Working capital cash inflow working capital released net present value

#29

P100,000 / P25,000

amount b

now 1 - 6 years 6

(30,000.00) 10,000.00 30,000.00

factor at 18% c 1.00 3.50 0.37

present value d (b x c) (30,000.00) 34,980.00 11,100.00 16,080.00

4 years

=

#30

investment year

payback is 5 years or at year 5

1 2 3 4 5

outflow inflows (50,000.00) 20,000.00 20,000.00 (50,000.00) 20,000.00 20,000.00

balance (50,000.00) (30,000.00) (10,000.00) (20,000.00) -

#31

Net income AROR

#32

=

(P30,000 - {P100,000 - P10,000}) =

=

5 years P12,000 / { (P100,000 + P10,000)/ 2 } =

P50,000 x 30% =

#33

Profitability Index (PI)

=

P30,000 - P18,000 =

#35

Payback

=

21.81% or 22%

P15,000

PV of cash inflow

P30,000 / P6,000

P40,000

5 years

=

Cash flows Less, depreciation (P30,000 / 5 years)

6,000.00 2,000.00

Net savings

4,000.00 P4,000 / P30,000

#36

= 1.25

P50,000

Investment

#34

12,000.00

13.30%

=

Working capital is an investment not an expense, so no tax adjustment is needed

PROBLEMS 9.1

Cost Delivery and set up costs

475,000.00 12,500.00

Total investment costs Average income per year

5 days x 52 weeks x P400 =

Less, Average operating costs per year Cash net income

5 days x 52 weeks x P25

6,500.00 97,500.00

Less, Depreciation costs Net income

(P487,500 - P27,500) / 10 years =

46,000.00 51,500.00

a

Cash payback

b

Present values of annual inflows Present values of salvage value

c

487,500.00 104,000.00

5.00

P487,500 / P97,500 = P97,500 x 6.418 P27,500 x .422

10years at 9%

625,755.00 11,605.00

Total Present values Initial cost of investment

637,360.00 487,500.00

Net present value

149,860.00

Annual Rate of Return

P51,500 / [ (487,500 + P27,500 ) / 2 ] = P51,500 / P257,500 =

20%

years

9.2

Annual net income Annual cash flows a b

Cost of investment Payback Total Present values Initial cost of investment

30,000.00 78,000.00 240,000.00 3.08

P240,000 / P78,000 = P78,000 x 3.791

295,698.00 240,000.00 55,698.00

Net present value c

Annual Rate of Return

P30,000 / [ (240,000 + P0 ) / 2 ] = P30,000 / P120,000 =

25%

9.3

Red Annual net income Add, back depreciation

Payback, in years

Blue

30,000.00 Red: P400,000 / 8 yrs = P50,000 Blue : P560,000 / 8 yrs = P70,000

50,000.00

50,000.00 70,000.00

Annual cash flows a

80,000.00

120,000.00 5

Red: P400,000 / P80,000

4.67

Blue : P560,000 / P120,000 b

Total present values

Red

P80,000 x 5.747

Blue

P120,000 x 5.747

459,760.00

Initial investment cost Net present values c

Annual rate of return

Net income Average investments(Cost / 2) ARR (1 /2)

9.4

1 2

400,000.00

689,640.00 560,000.00

59,760.00

129,640.00

30,000.00

50,000.00

200,000.00 0.15

280,000.00 0.18

Net income

64,000.00

Depreciation Net cash inflows per year

52,500.00 116,500.00

Present value factor at 13% for 12 years Total present values

5.9176 689,400.40

a

Initial cost of investment Net present values

630,000.00 59,400.40

c

Payback

b

Internal rate of return PV Factor =

5.408

P630,000 / P116,500 =

P630,000 / P116,500 = 5.4077

Scanning at 12 year line , 5.4077 is approximately 15% True rate or exact rate using interpolation is computed as follows At 14% PV Factor =

5.660

at 16%

5.197 0.463

0.252

0.15089

15.089%

Exact rate =

years

14% + [{.2523 / .463} x 2% ] = 14% + .01089 =

5.660 5.408

years

9.5

Cash flows year

a

PVF at 12%

Cool

1

0.893

2 3

0.797 0.712

Hot

Cash flows 38,000.00

PV of cash flows 33,934.00

42,000.00 48,000.00 128,000.00

33,474.00 34,176.00 101,584.00

Cost of investments Net present values

Cash flows PV of cash flows 42,000.00 37,506.0 42,000.00 42,000.00 126,000.00

33,474.0 29,904.0 100,884.0

90,000.00 11,584.00

90,000.00 10,884.00

1.13

1.1

PV of Hot can be computed at P42,000 x 2.402 = P100,884 also b

Profitability index = PV / Cost

c

Both are acceptable, however, Cool is preferred as it has higher NPV ang PI

a

Machine 1

9.6 Present values

(P50,000 - P15,000) x 4.486 =

157,010.00

Cost Net present values

152,000.00 5,010.00

Machine 2 Present values

(P60,000 - P20,000) x 4.486 =

179,440.00

Cost Net present values b

c

d

Machine 1

P157,010 / P152,000 =

1.03

Machine 2

P179,440 / P170,000 =

1.06

IRR Machine 1 PV Factor = P152,000 / P35,000 =

4.34

PV Factor at 6 years of 4.355 is at

Machine 2 PV Factor = P170,000 / P40,000 =

4.25

PV Factor at 6 years of 4.231 is at

Both machines are acceptable NPV both are positive PI both are more than 1 IRR

9.7 a

170,000.00 9,440.00

both are greater than the minimum required rate of return of 9%

1 Cash payback =

P320,000 / P62,000 =

2 Present values P62.000 x 5.535 Cost of investment

343,170.00 320,000.00 23,170.00

Net Present value 3 Profitability index = P343,170 / P320,000 = 4 Internal rate of return (IRR) =

5 Annual rate of return (ARR) =

5.16

P320,000 / 62,000 = 5.16 5.16 for 8 years is at

1.07

11%

P22,000 / [(P320,000 + 0) / 2] = 13.75%

years

9.8 a

Based on estimates: Present values

P70,000 x 4.355 =

304,850.00

Initial costs Net present value

300,000.00 4,850.00 accept

b

Based on actual: Present values

P58,000 x 5.759 =

334,022.00

Initial costs Net present value

340,000.00 (5,978.00) reject

9.9 a

Present value of annual cash flows = P4,300 x 5.335 Present value of salvage value =

P3,000 x .467

Total present values Cost

Present value of annual cash flows = Present value of salvage value =

(658.50) (P4,300 + P500) x 5.335 P3,000 x .467

Total present values Cost Net present value c

9.10 a

b

c

1,401.00 24,341.50 25,000.00

Net present value negative - reject b

22,940.50

25,608.00 1,401.00 27,009.00 25,000.00

positive - accept

2,009.00

Additional benefits would need to have a total present value of at least P658 in order for the van to be purchased

Present value of net cash flows (P2,520,000 - P2,250,000) = P270,000 x 8.514 =

2,298,780.00

Present value of salvage value = P3,900,000 x .149 = Total present values

581,100.00 2,879,880.00

Investment costs Net present value

2,700,000.00 179,880.00

Present value of net cash flows (P2,085,000 - P1,875,000) = P210,000 x 8.514 =

1,787,940.00

Present value of salvage value = P3,900,000 x .149 = Total present values

581,100.00 2,369,040.00

Investment costs Net present value

2,700,000.00 (330,960.00)

Present value of net cash flows (P2,520,000 - P2,250,000) = P270,000 x 7.469 =

2,016,630.00

Present value of salvage value = P3,900,000 x .104 = Total present values

405,600.00 2,422,230.00

Investment costs Net present value

2,700,000.00 (277,770.00)

If # of campers attending each week is only 80, NPV decreases by P510,840, that is from positive P179,880 to a negative P330,960. Investment should not be made unless attedees is closer to 100.

9.11 a

Old loss

(2,000.00)

New Net income (loss)

Receipts

P20,000 x 5% =

1,000.00

Depreciation

P12,000 / 10 years =

1,200.00

Net income (Loss)

(200.00)

Net difference b

(1,800.00)

Payback on the vending machine only

P12,000. / P 1,000 =

12 years

relevant payback: Payback

Change in cash flow is P3,000 = salary of employee terminated P12,000 / P3,000 =

4.00

c 1 Present value of inflows

P3,000 x 4.195 =

12,577.50

Cost of investment

12,000.00

Net present value

577.50

2 IRR is approximately 23% d

Present value P3,000 - (P14,000 x 5%) = Cost

11,319.75 12,000.00

Net present value e

Cost

P12,000 / 4.1925 = P2,862.25 Receipts =

9.12 a

(680.25)

(P2,862.25 - P2,000) / 5% =

17,245.00

Revenue

100,000.00

Cash expense Annual cash inflow b

Present value

60,000.00 40,000.00

P40,000 x 4.4941

179,764.00

Cost

160,000.00

Net present value

19,764.00

c

IRR factor

P160,000 / P40,000 = 4.00

d

Payback =

P160,000 / P40,000 = 4 years

e

Profitability index

f

IRR > than required

P179,764 / P160,000 =

PB < than required depends on which one will be given more weight.

approximately

23% 4 years 1.1235

9.13 a

Cash payback

P262,000 / P42,400 =

b

IRR

at 12 years 6.1793 is approximately 12%

c

Present value

P42,400 x 6.8137 =

6.1792 12% 288,900.88

Cost

262,000.00

Net present value d

26,900.88

yes, acceptable

9.14 1

Use table PV of Ordinary Annuity of P1 P200,000 = Annual Payments x the factor at interest rate at 30 years a

AP = P200,000 / 11.2578

17,765.46

b

AP = P200,000 / 9.4269

21,215.88

c

AP = P200,000 / 8.0552

24,828.68

2

P200,000 = Annual Payments x the factor at interest rate at 15 years a

AP = P200,000 / 8.5595

23,365.85

b

AP = P200,000 / 7.6061

26,294.68

c

AP = P200,000 / 6.8109

29,364.69

3 a

Total payments = 30 x P21,216 =

636,480.00

Total interest paid P636,480-200,000 b

436,480.00

Total payments = 15 x P26295 =

394,425.00

Total interest paid P394,425 - 200,000

9.15 a

Use table PV of P1 PV of P1 at 12% for 5 years is .5674

194,425.00

The P500 million is the future amount

PV = P500,000,000 x .5674 = b

283,700,000.00

Use table PV of Ordinary annuity of P1. The P100 million is a uniform periodic payment at the end of series of years. Therefore it is an annuity. PV of Annuity = P100,000,000 x 3.6048 =

360,480,000.00

In particular, note that Prudential is willing to lend more than in No. 1 even though the interest rate is the same. Because the company will get its money back more quickly.

9.16 a

PV = P30,000 x .6302

18,906.00

b

PV = P30,000 x ..4104

12,312.00

c

Halves the rates and double the number of periods. Present values decline: PV = P30,000 x .6246

18,738.00

9.17 a

P80,000 = Future amount x .3050

FA = P80,000 / .30

262,295.08

b

P80,000 = Future annual amount x 4.3436

FAA = P80,000 / 4

18,417.90

9.18

List price

42,000.00

Less, Trade in allowance Initial cash outlay

(9,000.00) 33,000.00

Present value of cash operating savings, from 12 year, PV of ordinary annuity at 12% = P5,000 x 6.1944

30,972.00

Net present value - NPV is negative, do not buy

(2,028.00)

The trade-allowance really consists of a P3,000 adjustment of the selling price and a bonafide P6,000 cash allowance for the old equipm...