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CAPITAL BUDGETINGQUIZ 1MULTIPLE CHOICE The consulting firm of Magaling Corporation is considering the replacement of their computer system. Taking into account the income tax effect and considering the carrying value of the old system (CVOS) and the salvage value of the new system (SVNS), which comb...

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CAPITAL BUDGETING QUIZ 1 MULTIPLE CHOICE 1. The consulting firm of Magaling Corporation is considering the replacement of their computer system. Taking into account the income tax effect and considering the carrying value of the old system (CVOS) and the salvage value of the new system (SVNS), which combination below applies to the decision making process? a. CVOS, irrelevant and SVNS irrelevant. b. CVOS, irrelevant and SVNS relevant. c. CVOS, relevant and SVNS irrelevant. d. CVOS, relevant and SVNS relevant. 2. As a capital budgeting technique, the payback period considers depreciation expense (DE) and time value of money (TVM) as follows: a. DE, relevant and TVM irrelevant b. DE, irrelevant and TVM irrelevant c. DE, irrelevant and TVM relevant d. DE, relevant and TVM irrelevant 3. Mahlin Movers, Inc. is planning to purchase equipment to make its operations more efficient. This equipment has an estimated useful life of six years. As part of this acquisition, a P150,000 investment in working capital is required. In a discounted cash flow analysis, this investment in working capital a. Should be amortized over the useful life of the equipment b. Should be disregarded because no cash is involved c. Should be treated as a recurring annual cash flow that is recovered at the end of six years. d. Should be treated as an immediate cash outflow that is recovered at the end of six years. 4. If income tax considerations are ignored, how is depreciation used in the following capital budgeting techniques? a. Internal Rate of Return, Included; Acctg. Rate of Return, Excluded. b. Internal Rate of Return, Excluded; Acctg. Rate of Return, Included. c. Internal Rate of Return, Excluded; Acctg. Rate of Return, Excluded d. Internal Rate of Return, Included; Acctg. Rate of Return, Included. 5. KAREN company is considering replacing an old machine with a new machine. Which of the following items is economically relevant to KAREN’s decisions? Ignore income tax considerations.

a. Carrying amount of old machine – Yes Disposal value of new machine – Yes b. Carrying amount of old machine – Yes Disposal value of old machine – No c. Carrying amount of old machine – No Disposal value of old machine – Yes d. Carrying amount of old machine – No Disposal value of old machine – No 6. Key Corp. plans to replace a production machine that was acquired several years ago. Acquisition cost is P450,000 with residual value of P50,000. The machine being considered is worth P800,000 and the supplier is willing to accept the old machine at a trade-in value of P60,000. Should the company decide not to acquire the new machine, it needs to repair the old one at a cost of P200,000. Tax wise, the trade-in transaction will not have any implication but the cost to repair is tax deductible. The effective corporate tax rate is 35% of net income subject to tax. For purposes of capital budgeting, the net investment in the new machine is a. P540,000 b. P610,000 c. P660,000 d. P800,000 7. 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 initial 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 8. Lawson Inc. is expanding its manufacturing plant, which requires an investment of P4 million in new equipment and plant modifications. Lawson’s sales are expected to increase by 3Million per year as are result of the expansion. Cash investments in current assets average 30% of sales; accounts payable and other current liabilities are 10% sales. What is the estimated total investment for this expansion? a. P3.4 million b. P4.3 million c. P4.6 million d. P5.2 million 9. Regal industries is replacing a grinder purchased 5 years ago for P15,000

with a new one costing P25,000 cash. The original grinder is being depreciated on a straight-line basis over 15 years to a zero residual value. Regal will sell this old equipment to a third party for P6,000 cash. The new equipment will be depreciated on a straight-line basis over 10 years to a zero salvage value. Assuming a 40% marginal tax rate, Regal’s net cash investment at the time of purchased if the old grinder is sold and the new one purchased is: a. P19,000 b. P15,000 c. P17,400 d. P25,000 10. A company considers a project that will generate cash sales of P50,000 per year. Fixed costs will be P10,000 per year, variable costs will be 40% of sales, and depreciation of the equipment in the project will be P5,000 per year. Taxes are 40%. The expected annual cash flow to the company resulting from the project is a. P15,000 b. P9,000 c. P19,000 d. P14,000 11. Whatney Co. is considering the acquisition of a new, more efficient press. The cost of the press is P360,000, and the press has an estimated 6-year life with zero residual value. Whatney uses straight-line depreciation for both financial reporting and income tax reporting purposes and has 40% corporate income tax. In evaluating equipment acquisitions of this type, whatney uses goal of a 4-year payback period. To meet Whatney’s desired payback period, the press must produce a minimum annual before tax operating cash saving of a. P90,000 b. P110,000 c. P114,000 d. P150,000 12. Garfield, Inc. is considering a 10-year capital investment project with forecasted revenues of P40,000 per year and forecasted cash operating expenses of P29,000 per year. The initial cost of the equipment for the project is P23,000, and Garfield expects to sell the equipment’s for P9,000 at the end of the tenth year. The equipment’s will be depreciated over 7 years. The project requires working capital investments of P7,000 at its inception and another P5,000 at the end of year 5. Assuming a 40% marginal tax rate, the expected net cash flow from the project in the tenth year is a. P32,000 b. P24,000 c. P20,000 d. P11,000

13. The payback capital budgeting technique considers Income over entire Time value Life of project of money a. No No b. No Yes c. Yes Yes d. Yes No 14. A machine costing P1,000 produces total cash inflows of P1,400 over 4 years. Determine the payback period given the following cash flows: YEAR After-Tax Cash Flows Cumulative Cash Flows 1 400 400 2 300 700 3 500 1,200 4 200 1,400 a. 2 years b. 2.60 years c. 2.86 years d. 3 years 15. Nonoy Company is planning to purchase a new machine for P500,000. The new machine is expected to produce cash flow from operations, before income taxes, of P135,000 a year in each of the next five years. Depreciation of P100,000 a year will be charged to income for each of the next five years. Assume that the income tax rate is 40%. The payback period would be approximately a. 2.2 years b. 3.4 years c. 3.7 years d. 4.1 years 16. The Folk Company is planning to purchase a new machine which will depreciate on a straight-line basis over a ten-year period with no residual value and a full year’s depreciation in the year of acquisition. The new machine is expected to produce cash flow from operations, net of income taxes, of P66,000 a year in each of the next ten years. The accounting (book value) rate of return on the initial investment is expected to be 12%. How much will the new machine cost? a. P300,000 b. P550,000 c. P660,000 d. P792,000

17. Jasper Company has a payback goal of 3 years new equipment acquisitions. A new sorter is being evaluated that the costs of P450,000 and has a 5-year life. Straight-line depreciation will be used; no residual value is anticipated. Jasper is subject to a 40% income tax rate. To meet the company’s payback goal , the sorter must generate reductions in annual cash operating costs of a. P60,000 b. P100,000 c. P150,000 d. P190,000 18. The following statements refer to the accounting rate of return (ARR) 1. The ARR is based on the accrual basis, not the cash basis 2. The ARR does not consider the time value of money 3. The profitability of the project is not considered

a. b. c. d.

From the above statements, which are considered limitations of the ARR concept? Statements 2 and 3 only Statements 3 and 1 only All the 3 statements Statements 1 and 2 only

19. The method of project selection which considers the time value of money in capital budgeting decision is accomplished by computing the a. Accounting rate of return b. Payback period c. Accounting rate of return on average investment d. Discounted cash flow 20. Anton Corporation is planning to buy a new machine with the expectation that this investment should earn a discount rate of return of at least 15%. This machine, which costs P150,000, woluld yield an estimated net cash flow of P30,000 a year for 10 years, after income taxes. In order to determine the net present value of buying the new machine. Anon should first multiply tne P30,000 by what amount of the following factors? a. 20.304 (Future amount of an ordinary annuity of P1) b. 5.019 (Present value of an annuity of P1) c. 4.046 (Future amount of P1) d. 247 (Present value of P1) (aicpa) 21. In income tax considerations are ignored, how is depreciation expense used in the following capital budgeting techniques? Internal rate of return Payback a. Excluded Excluded b. Excluded Included c. Included Excluded d. Included Included

22. Garfield Company purchased which will be depreciated on he straight line basis over an estimated useful life of seven years and no residual value. The machine is expected to generate cash flow from operations, net of income taxes, of P80,000 in each o seven years. Garfield's expected rate of return is 12%. Information on preent value factrs is as follows: Present value of P1 at 12% for seven periods 0.452 Present value of an ordinary annuity of P1 at 12% for 7 periods 4.564 Aassuming a positive net present value of P12,720, what was the cost of machine? a. P240,000 c. P352,400 b. P253,120 d. P377,840 23.

It is the start of the year and St. Tropez Co. plans to replace its old singalong equipment. These information are available Old New Equipment cost P70,000 P120,000 Current salvage value 10,000 Residual value, end of useful life 2,000 16,000 Annual operating costs 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 i the present value of all the relevant cash flows at time zero? a.(P54,000) c.(P120,00) b.(P110,000) d. (P124,000)

24. McIndon Corporation bought a major equipment which is depreciable over 7 years on a straight line basis without residual value. It is estimated that it would generate cash flow from operations, net of income taxes, of P800,000 in each of seven years. The company's expected rate of return is 12%. Based on estimates, the project has a net present value of P127,200. What is the cost of the equipment? a. P3,651,200 b. P3,524,000

c. P2,404,000 d. P3,778,400

(rpcpa)

25. FTG Corporation is evaluating the purchase of P500,000 dir attach machine. The cash inflows expected from the investment is P145,000 per year for five years with no equipment salvage value. The cost of capital is 12%.. The internal rate of return for this investment is a. 9%-10% c.13%-14% b. 11%-12% d. 15%-16%

26.GUTZY Corporation is planning to invest P80,000 in a three-year project. GUTZY's expected rate of return is 10%. The cash flow, net of income taxes, will be P30,000 for the first year and P36,000 for the second year. Assuming the rate of return is exactly 10%, what will the cash flow, net of income taxes, be for the third year? (Round off the PV factor to 3 decimal places) a. P17,268 c, P22,994 b. P22,000 d. P30,618 27. Mr. Al Yu is an entrepreneur who contemplates to buy a machine to increase the capacity of his manufacturing operations. He consults you for advise on the alternatives of leasing or buying the equipment. If purchased, the straight line depreciation expense will be {18,700 annually over its life of 5 years. The annual lease payment will amount to P29,000 payable at the end of each of the 5 years. Cost of money is 18%. Tax rate is 35%. There is no salvage value. Presents value of P1 received annually for 5 years at 18% is 3.127. present value of P1 due in 5 years at 18% is .437. What will you recommend and why? a. Lease the machine because leasing saves P2,817. b. Lease the machine because leasing saves P27,138. c. Buy the machine because depreciation saves P10,300 each year. d. Lease the machine because outlay is less by P51,500. Questions 28 through 30 are based on the following information. A company purchased a new machine to stamp the company logo on its products. The cost of the machine was P250,000 and it has an estimated useful life of 5 years with an expected salvage value at the end of its useful life P50,000. The company uses the straight –line depreciation method. The machine is expected to save P125,000 annually in operating costs. The company’s tax rate is 40% and it uses a 10% discount rate to evaluate capital expenditures. (Round off the PV factor to 3 decimal places) 28. .What is the traditional payback period for the new stamping machine? a.2.00 years c. 2.75 years b.2.63 years d. 2.94 years 29. What is the accounting rate of return based on the average investment in the new stamping machine? a.20.4% b.34.0%

c. 40.8% d. 51%

30. What is the net present value (NPV) of the new stamping machine a.P125,940 c. P250,000 b.P200,000 d. 375, 940

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