270673974-Cb-problems PDF

Preview

Summary

MANAGEMENT ADVISORY SERVICES REVIEWQUIZ ON CAPITAL BUDGETING- PROBLEMSNAME: _______________________________________ _____________DATE: _____________________SCORE: _________________INSTRUCTIONS: WRITE BEFORE THE NUMBER THE LETTER OF YOUR CHOICE. STRICTLY NOERASURE OR ALTERATION IS ALLOWED. NO SOLUTIO...

Description

MANAGEMENT ADVISORY SERVICES REVIEW QUIZ ON CAPITAL BUDGETING- PROBLEMS NAME: _______________________________________ _____________DATE: _____________________ SCORE: _________________ INSTRUCTIONS: WRITE BEFORE THE NUMBER THE LETTER OF YOUR CHOICE. STRICTLY NO ERASURE OR ALTERATION IS ALLOWED. NO SOLUTION, NO CREDIT. 1.

2.

3.

4.

5.

6.

7.

8.

Acme is considering the sale of a machine with a book value of P160,000 and 3 years remaining in its useful life. Straight-line depreciation of P50,000 annually is available. The machine has a current market value of P200,000. What is the cash flow from selling the machine if the tax rate is 40%? a. P50,000 b. P160,000 c. P184,000 d. P200,000 Altoona Company is considering replacing a machine with a book value of P200,000, a remaining useful life of 4 years, and annual straight-line depreciation of P50,000. The existing machine has a current market value of P175,000. The replacement machine would cost P320,000, have a 4 year life, and save P100,000 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. P28,000 b. P40,000 c. P42,000 d. P64,000 An investment opportunity costing P300,000 is expected to yield net cash flows of P100,000 annually for five years. The profitability index of the investment at a cutoff rate of 14% would be a. 3.0. b. 1.14. c. 0.33. d. 14%. A project has a NPV of P30,000 when the cutoff rate is 10%. The annual cash flows are P41,010 on an investment of P100,000. The profitability index for this project is a. 1.367. b. 3.333. c. 2.438. d. 1.300. Portage Press Company is considering replacing a machine with a book value of P200,000, a remaining useful life of 5 years, and annual straight-line depreciation of P40,000. The existing machine has a current market value of P200,000. The replacement machine would cost P300,000, have a 5-year life, and save P100,000 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 net cash flow if the company replaces the machine? a. P60,000 b. P68,000 c. P76,000 d. P84,000 Winneconne Company is considering replacing a machine with a book value of P400,000, a remaining useful life of 5 years, and annual straight-line depreciation of P80,000. The existing machine has a current market value of P400,000. The replacement machine would cost P550,000, have a 5-year life, and save P75,000 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 net investment required to replace the existing machine? a. P90,000 b. P150,000 c. P330,000 d. P550,000 An investment opportunity costing P75,000 is expected to yield net cash flows of P23,000 annually for five years. The NPV of the investment at a cutoff rate of 14% would be a. P(3,959). b. P3,959. c. P75,000. d. P78,959. An investment opportunity costing P55,000 is expected to yield net cash flows of P22,000 annually for five years. The payback period of the investment is a. 0.4 years.

b. 2.5 years. c. P33,000.

d. some other number. An investment opportunity costing P180,000 is expected to yield net cash flows of P53,000 annually for five years. The IRR of the investment is between a. 10 and 12%. b. 12 and 14%. c. 14 and 16%. d. 16 and 18%. 10. An investment opportunity costing P150,000 is expected to yield net cash flows of P45,000 annually for five years. The cost of capital is 10%. The book rate of return would be a. 10%. b. 20%. c. 30%. d. 33.3%. 11. An investment opportunity costing P150,000 is expected to yield net cash flows of P36,000 annually for six years. The NPV of the investment at a cutoff rate of 12% would be a. P(2,004). b. P2,004. c. P150,000. d. P147,996. Use the following to answer questions 12-13: (Ignore income taxes in this problem.) Cedar Hill Hospital needs to expand its facilities and desires to obtain a new building on a piece of property adjacent to its present location. Two options are available to Cedar Hill, as follows: Option 1: Buy the property, erect the building, and install the fixtures at a total cost of P600,000. This cost would be paid off in five installments: an immediate payment of P200,000, and a payment of P100,000 at the end of each of the next four years. The annual cash operating costs associated with the new facilities are estimated to be P12,000 per year. The new facilities would be occupied for thirteen years, and would have a total resale value of P300,000 at the end of the 13-year period. Option 2: A leasing company would buy the property and construct the new facilities for Cedar Hill which would then be leased back to Cedar Hill at an annual lease cost of P70,000. The lease period would run for 13 years, with each payment being due at the BEGINNING of the year. Additionally, the company would require an immediate P10,000 security deposit, which would be returned to Cedar Hill at the end of the 13-year period. Finally, Cedar Hill would have to pay the annual maintenance cost of the facilities, which is estimated to be P4,000 per year. There would be no resale value at the end of the 13-year period under this option. The hospital uses a discount rate of 14% and the total-cost approach to net present value analysis in evaluating its investment decisions. 12. Under option 1, the present value of all cash outflows associated with buying the property, erecting the building, and installing the fixtures is closest to: A) P(200,000) B) P(491,400) C) P(600,000) D) P(387,200) 13. Under option 1, the net present value of all cash flows is closest to: A) P(456,000) B) P(600,000) C) P(300,000) D) P(507,000) Use the following to answer questions 14-16: (Ignore income taxes in this problem.) Perky Food Corporation produces and sells coffee jelly. Perky currently produces the jelly using a manual operation but is considering the purchase of machinery to automate its operations. Information related to the two operations is as follows: Manual Automated Operation Operation Cost of machinery ..................................... – P420,000 Useful life of machinery ............................ – 12 years Expected salvage value in 12 years ........... – P0 Expected annual revenue (50,000 jars) ..... P210,000 P210,000 Expected annual variable costs ................. P135,000 P42,000 Expected annual fixed costs ...................... P30,000 P72,000 Perky's discount rate is 12%. Perky uses the straight-line method of depreciation. 14. What is the net present value of automating operations using the incremental cost approach? A) P11,940 B) P56,940 C) P(104,106) D) P112,684 15. Within what range does the internal rate of return fall? 9.

A) 6% to 8%...