Operating cash inflow PDF

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Operating cash inflow The Lakers Company is interested in buying a piece of equipment that is needs. The following data assembled concerning this equipment: Cost of required equipment P250,Working capital required P100,Annual operating cash inflow 80,Cash repair at end of 4 years 40,Salvage value at...

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Operating cash inflow

1. The Lakers Company is interested in buying a piece of equipment that is needs. The following data assembled concerning this equipment: Cost of required equipment

P250,000

Working capital required

P100,000

Annual operating cash inflow

80,000

Cash repair at end of 4 years

40,000

Salvage value at end of 6 years

90,000

This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital is 10%. Use the net present value method to answer the following question.

The PV of all future operating cash inflow is a. b. c. d.

P617,280 P45,120 P348,400 P278,710

Answer: C. Annual Operating Cash Inflow X Present Value of 1 in 6 periods Present Value of Operating Cash Inflow

P 80,000 4,355 P348,400

2. The Jackson Company has invested in a machine that cost P70,00, that has a useful life of seven years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have payback period of four years. Given these data, the simple rate of return (to the nearest tenth of a percent) on the machine will be (ignore taxes) a. 7.1% b. 8.2%

c. 10.7% d. 39.3% Answer: C. Investment Cost Divided by Payback Period

P70,000 4

Annual Cash Inflow

17,500

Less: Depreciation (P70,000/ 7yrs.)

10,000

Income

7,500

Divided by Investment

70,000

Simple Rate of Returns

10.7%

3. A project required an initial investment of P70,000 and has a profitability index of 1.141. the present value of the future cash inflow from this investment is a. P61,350 b. P68,920 c. P75,210 d. P79,870 Answer: D Present Value of Investment

P70,00

X Profitability Index Present Value of Future Cash Inflow

1.141 P79,870

4. Consideration is being given to the possible purchase of a P30,000 machine for Alo, which is expected to result in a decrease of P12,000 per year in cash operating expenses. This machine, which has no residual value, has an estimated useful life of five years and will be depreciated on a straight-line basis. (ignore income taxes) a. 12% b. 20% c. 30% d. 40% Answer: B Annual Savings

P12,000

Less: Depreciation (P30,000/5)

6,000

Increment Income

6,000

Divided by Investment

30,000

Simple Rate of Return

20%

5. The Habagat, inc. is planning to spend P600,000 for a machine that it will depreciate on a straight line basis over a ten year period with no terminal disposal price. The machine will generate cash flow from operations of P120,000 a year. Ignoring income taxes, what is the accounting rate of returns on the net investment ? a. 5%

b. 10%

c. 12%

d. 15%

Answer: C Annual Cash Flow

P120,000

Less: Depreciation (P600,000/10)

60,000

Accounting Net Income

60,000

Divided by Investment

600,000

Accounting Rate of Return

10%

6. The Yates Company purchased a piece of equipment which is expected to have a useful life of 7 years with no salvage value at the end of the 7-year period. This equipment is expected to generate a cash inflow of P32,000 each year of its useful life. If this investment has a timeadjusted rate of return of 14%, then the initial cost of the equipment is a. P150,000 b. P137,216 c. P12,800 d. P343,360 Answer: B Annual Cash Inflow Present Value of an Annuity of 1 in 7 periods Initial cost of the Equipment (PV of ACI)

P32,000 4.288 P137,216

7. A firm must choose between leasing a new asset or purchasing it with funds from a term loan. Under the purchase option, the firm will pay five equal principal payments of P1,000 each and 6% interest on the unpaid balance. Principal and interest are due at the each year for five years. Alternatively, the firm can lease the asset for five years at an annual rental cost of P1,400 with payments due at the beginning of each year. The corporate tax rate is 35% and the appropriate after-tax cost of capital is 12%. Which of the following is closest to the present value of the after-tax cost of leasing the new asset? a. b. c. d.

P3,674 P3,779 P3,849 3,992

Answer: A [P1,400 X 0.65 + (P1,400 X 0.65) (3.037)] = P3,674 8. Duke University has a small shuttle bus that is in poor mechanical condition. The bus can be either overhaul now or replaced with a new shuttle bus. The following data have been gathered concerning this two alternatives: Present Bus New Bus Purchased cost new Remaining book value Major repair needed now

P32,000 21,000 9,000

Annual cash operating costs

12,000

Salvage value now

10,000

Salvage value seven years from now

P40,000

2,000

8,000

5,000

The university could ‘continue to use the present bus for the next seven years. If the new bus is purchased, it will be used for the next 7 years and then traded in for another bus. The university uses a discount rate of 12% and the total cost approach to net present value analysis in evaluating its investment decisions. If the new bus is purchased, the present value of all cash flows that occur now is a. (P4,000) b. (P9,000) c. (P21,000)

d. (P30,000) Answer: D Purchase cost (New Bus)

P40,000

Salvage Value (Present Bus)

10,000

Present Value All Cash Flows Occurring Now

P30,000

9. The Ralph Company is considering buying a new machine which will require a initial outlay of P15,000. The company estimated that over the next four years the machine would save P6,000 per year in cash operating expenses. At the end of four years, the machine would have no salvage value. The company’s cost of capital is 14%. The net present value of this investment is a. (P12632) b. P17,484 c. P2,484 d. P3,612 Answer: C Present value of cash inflow (P6,000 x 2.914) P17,484 Less: Net Investment 15,000 Net Present Value of Investment P 2,484 10. The president of Trial Company is considering a proposal by the factory manager for the purchase of a machine for P44,000, the useful life would be eight years with no residual scrap value. The use of the machine will produce a positive annual cash flow of P10,000 a year for eight years. An annuity table shows the present value of P1 received annually for eight years and discounted at 12% is 4.968. the net present value of the proposal, discounted at 12% is: a. P5,680 positive b. Zero c. P2,186 negative d. P2,186 positive Answer: A Present Value of Cash Inflows (P10,000 x 4.968) Less: Cost of Investment Net Present Value

P49,680 44,000 P 5,680

Net Initial Investment 1. Diliman Republic Publishers, Inc. is considering replacing an old press that cost P800,000 six years ago with a new one that would cost P2,250,000. Shipping and installation would cost an additional P200,000. The old press has a book value of P150,000 and could be sold currently for P50,000. The increased production of the new press would increase inventories by P40,000, accounts receivable by P160,000 and accounts payable by P140,000. Diliman Republic’s net investment for analyzing the acquisition of the new press assuming a 35% income tax rate would be a. P2,450,000 b. P2,425,000 c. P2,600,000 d. P2,250,000 Answer: B Purchase Price Add: Shipping Cost Total Cost Add: Tax Savings

P2,250,000 200,000 2,450,000 35,000 2,485,000

Less: Increase in Working Capital Net Initial Investment

60,000 P2,425,000

2. Verb, Inc., is considering a project that would have a ten-year life and would require a P1,000,000 investment in equipment would have no salvage value. The project would provide net income each year as follows: Sales………………………………………………………………………. P2,000,000 Less: variable expenses………………………………………….

1,400,000

Contribution margin………………………………………………..

600,000

Less fixed expenses…………………………………………………

400,000

Net income…………………………………………………………….. P200,000 All of the above items, except for depreciation of P100,000 a year, represent cash flows. The depreciation is included in the fixed expenses. The company’s required rate of return is 12%. What is the project’s net present value?

a. b. c. d.

P650,000 P695,000 P1,300,000 P700,000

Answer: B Net income Depreciation Net annual cash flow Years Initial investment net annual cash flows net present value

now 1-10

Amount P(1,000,000) 300,000

12% factor

present value

1,000 5,650

P(1,000,000) 1,695,000 P 695,000

3. Chum Company’s required rate of return is 14%. The company has an opportunity to be the exclusive distribution of a very popular consumer item. No new equipment would be needed, but the company would have to use one-fourth of the in a warehouse it owns. The warehouse cost P200,000 new. The warehouse is currently half-empty and there are no other plans to use the empty space. In addition, the company would have the distributorship for only 5 years. The distributorship would generate a P17,000 net annual cash inflow. Ignore income taxes. The net present value of the project at a discount rate of 14% is a. P12,111 b. P143,077 c. P210,261 d. P10,261 Answer: D

Working Capital Investment Annual cash flows Working capital released Net Present value

Year now 1-5 5

Amount P(100,000) 17,000 100,000

14% Factor 1.000 3.433 0.519

Present Value P(100,000) 58,361 51,900 P10,261

4. Andres Company is considering the purchase of a machine that promises to reduce operating cost by the same amount for every year of its 6-year useful life. The machine will cost P83,150 and has no salvage value. The machine has a 20% internal rate of return. Ignore income taxes. The annual cost saving promised by the machine is a. P25,000 b. P50,000

c. P35,000 d. P20,000 Answer: A Investment required / Net annual cash inflow = Factor of the internal rate of return P83,150/net annual cash inflow = 3.326 P83,150 / 3.326 = net annual cash inflow = P25,000 5. Information about a company Sweetie Company is considering follows: Investment Revenue Variable costs Fixed out-of-pocket costs Weighted average cost of capital Tax rate

P300,000 P190,000 P50,000 P25,000 8% 40%

The property is considered 5-year property for tax purposes. The company plans to dispose of the property at the end of the third year. Salvage value at the time is expected to be P60,000. Assume all cash flows occur at the end of the year (round to the nearest pesos). Sweetie’s after-tax cash inflow from disposal is a. b. c. d.

P82,080 P84,000 P86,250 P93,060

Answer: A Salvage value Book value (P300,000-P60,000-P96,000-P28,800*) Loss *Depreciation for one-half year is taken in the year of disposal Tax savings = P55,200 x 40% = P22,080 Net cash flow at disposal = P60,000 + P22,080 = P82,080 6. Evergreen has an investment opportunity costing P300,000 that is expected to yield the following cash flows over the next six years:

Year One Year Two Year Three Year Four Year Five Year Six

P570,00 P90,000 P115,000 P130,000 P100,000 P90,000

The net present value of the investment at a cutoff rate of 10% is a. b. c. d.

P130,000 P62,100 P88,750 P50,766

Answer: A

1 2 3 4 5 6

Cash

Factor

PV

75,000 90,000 115,000 130,000 100,000 90,000

0.909 0.826 0.751 0.683 0.621 0.564

68,175 74,340 86,365 88,365 62,100 50,760

Investment NPV

430,530 300,000 130,530

7. Crashdown Co. has the opportunity to introduce a new product. Crashdown expects the project to sell for P40 and to have per-unit variable costs of P25 and annual cash fixed costs of P2,500,000. Expected annual sales volume is 250,000 units. The equipment needed to bring out the new product costs P3,500,000, has a four-year life and no salvage value, and would be depreciated on a straight-line basis. Crashdown’s cutoff rates is 12% and its income tax rate is 40%. What is the increase in annual after-tax cash flows for this opportunity? a. P900,000 b. P1,100,000 c. P875,000 d. P1,000,000 Answer: B Income before taxes [P250,000 x (P40 – P25) - P2,500,000 – P3,500,000 /4] Income tax

P375,000 (150,000)

Net income Depreciation Net Cash flow

P225,000 875,000 P1,100,000

8. Consideration is being given to the possible purchase of a P20,000 machine for Maxi Company, which is expected to result in a decrease of P10,000 per year in cash operating expenses. This machine, which has no residual value, has an estimated useful life of five years and will be depreciated on a straight-line basis. (ignore income taxes) a. 1.67 years b. 2.00 years c. 4.17 years d. 5,00 years Answer: B Investment Divided by Annual Cash Returns Payback Period

P30,000 12,000 2.00 yrs.

9. Rano Co. has the opportunity to invest in a two-year project which is expected to produced cash flows from operation, net of income taxes, of P100,000 in the first year and P200,000 in the second year. Rano has a cost of capital of 20%. For this project, Rano should be willing to invest immediately a maximum of a. P283,300 b. P249,900 c. P222,100 d. P208,200 Answer: C P100,000 x 0.833 =P 833,000 P100,000 x 0.694 =P 138,800 P222,100

10. Verb, Inc., is considering a project that would have a ten-year life and would require a P1,000,000 investment in equipment would have no salvage value. The project would provide net income each year as follows: Sales………………………………………………………………………. P2,000,000 Less: variable expenses………………………………………….

1,400,000

Contribution margin………………………………………………..

600,000

Less fixed expenses…………………………………………………

400,000

Net income…………………………………………………………….. P200,000 All of the above items, except for depreciation of P100,000 a year, represent cash flows. The depreciation is included in the fixed expenses. What is the project’s internal rate of return? (Interpolate to the nearest tenth of a percent.) a. b. c. d.

25.5% 23.78% 27.3% 12.5%

Answer: C P1,000,000 / P300,000 = 3.333 26% factor true factor 28% factor

3.465 3.333

3.465 3.269

0.132 26% + 2% (0.312 / 0.916) = 27.3%

0.196...