SDFD
SDFD
SDFD
ES T A B L I S H E D 2003
2ndFlr.,ManangoBldg., City Road., Centro East, Santiago City, Philippines; Mobile No.: 09108298588
CAPITAL BUDGETING
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2. Corporation has sold P1 00,000,000 of P1,000 par 10. Jack Company is considering replacing a machine
value, 10% coupon bonds. The bonds were sold at a with a book value of P 400,000, a remaining useful
premium and the corporation received P1,200 per life of 5 years, and annual straight-line depreciation
bond. If the corporate tax rate is 30%, what is the of P 80,000. The existing machine has a current
after tax cost of these bonds for the first year? market value of P400,000. The replacement machine
a. 6.00% b. 6.50% would cost P 550,000, have a 5 year life, and save P
c. 5.83% d. 5.55% 75,000 per year in cash operating costs. If the
replacement machine would be depreciated using the
3. The preferred stock of B Corporation pays an straight-line method and the tax rate is 40%, what
annual dividend of P4.80. It has a required rate of would be the net investment required to replace the
return of 8%. Compute the price of the preferred existing machine?
stock? a. P 90,000 b. P 150,000
a. 60 b. 65 c. P 330,000 d. P 550,000
c. 58 d. 55
11. In deciding whether to replace a machine, which
4. C Corporation paid a dividend of P3.00 per share of the following is not a sunk cost?
on its common stocks last year. Over the net 12 a. The expected resale price of the existing
months, the dividend is expected to grow at 6%, machine
which is the constant growth rate (g) for the firm. b. The book value of the existing machine
The common stock currently sells for P50 per share. c. The original cost of the existing machine
Compute the required rate of return on the common d. The depreciated cost of the existing machine
stock?
a. 12.20% b. 12.50% 12. Jess Inc. recently acquired a machine at a cost of
c. 12.36% d. 13.00% P 64,000. It will be depreciated on a straight line
basis over 8 years, with no salvage value. Jess
D Corporation just paid a dividend of P4.00 per expects that this machine will produce P 18,000
share on its stock. The dividends are expected to annual net cash flow before income tax. Assuming an
grow at a constant rate of 7% per year, indefinitely. income tax rate of 50%, the appropriate payback
period on this investment is:
5. If investors require a 12% return on D’s a. 3.6 years b. 4.9 years
Corporation stocks, what is the current price? c. 7.1 years d. 12.8 years
a. 90 b. 95
c. 87.4 d. 85.6 13. Kat Corporation gathered the following data on
the two capital investment opportunities:
6. What will be the price be in two years?
a. 98 b. 95 Hard Auto Semi Auto
c. 97 d. 96 Cost of investment P 800,000 P 1,400,000
Discount rate 14% 14%
7. Use the basic equation for the capital asset pricing Net cash inflows P 365,000 P 590,000
model (CAPM) to work on each of the following:
a. Find the required rate of return for an asset For the coming period, the available fund for capital
with a beta of 0.80 when the risk-free rate of return investment projects is P 1,600,000 only. Both
is 6%, and the market risk premium is 4% machines have 4 year lives and no anticipated
salvage value. The company uses straight line
depreciation and has a 30% income tax rate.
b. Find the beta for an asset with a required
return of 7.4% when the risk-free rate and market Required:
return are 6% and 8%, respectively a. Which alternative has the higher net present
value?
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15. The internal rate of return (IRR) is the Hay Naku Co. manufactures copier equipment and
a. Hurdle rate has the opportunity to replace one of its existing
b. Rate of interest at which the net present value machines with a new model. The existing machine
is greater than 1.0 has a net book value of P 120,000 and a market
c. Rate of return generated from the operational value of P 60,000. It has an estimated remaining life
cash flows of four years, at which time it will have no salvage
d. Rate of interest at which the net present value value. The company uses straight line depreciation of
is equal to zero P 30,000 per year on the machine, and its annual
cash operating cost is P 280,000.
16. Ti Nakaw Corporation is planning to invest P
80,000 in a three- year project. Ti Nakaw’s expected The new model costs P500,000 and has a four year
rate of return is 10%. The present value of P1 at estimated life with no salvage value. Its annual cash
10% for 1st year, 2nd year and 3rd year are 0.909, operating cost is estimated at 160,000. The firm will
0.826, and 0.751 respectively. The cash flows, net of use straight line depreciation. The tax rate is 40%
income taxes, will be P 30,000 for the first year and the cost of capital is 12%. The purchase of the
(present value: P 27,270) and P 36,000 for the new, more efficient machine will enable the company
second year (present value: P 29736). Assuming the to reduce its investment in inventory by P 80,000.
rate of return is exactly 10%, what will be the net
cash flow, net of income taxes, for the third year? 23. Determine the investment required to purchase
a. P 17,260 b. P 22,000 the new machine.
c. P 22,904 d. P 30,618 a. 336,000 b. 335,000
c. 334,000 d. 340,000
17. Tsuk Aww, Inc. is planning to invest P 120,000 in
a 10-year project. Tsuk Aww estimates that the 24. Determine the net present value of the
annual cash inflow, net of income taxes, from this investment.
project will bee P 20,000. Tsuk Aww desired rate of a. 1,930 b. ( 1,930 )
return on investments of this type is 10%. c. 1,830 d. ( 1,830 )
Information on present value factors is as follow:
at 10% at 12% 25. Suppose that the new machine has a 10%
PV of P 1 for 10 periods 0.386 0.322 salvage value. The company will consider the salvage
PV of an annuity of value in determining annual depreciation. Determine
P 1 for 10 periods 6.145 5.650 the net present value of the investment.
a. 14,685 b. 15,685
Tsuk Aww’s internal rate of return on this investment c. 13,685 d. 14,000
is?
a. Less than 10%, but more than 8% 26. Suppose that new machine has a 10% salvage
b. 10% value. The company will ignore the salvage value in
c. Less than 12%, but more than 10% determining annual depreciation. The applicable tax
d. 12% rate is 40%. Determine the net present value of the
investment.
Lover boy Company has gathered the following data a. 17,550 b. 17,450
on a proposed investment project: c. 17,150 d. 17,250
Investment required in equipment P 142,500
Annual cash inflow 30,000 27. Mountain view hospital has purchased new lab
Life of investment 8 years equipment for P 134,650. The equipment is expected
Required rate of return 10% to last for three years and to provide cash inflows as
follows:
18. The payback period for the investment is closest
to: Year 1 P 45,000
a. 8.00 years b. 1.42 years Year 2 60,000
c. 4.75 years d. 0.21 years Year 3 ?
19. The simple rate of return on the investment is Assuming that the equipment will yield exactly a
closest to: 16% return, what is the expected cash inflow for
a. 8.55% b. 10.00% year three?
c. 21.05% d. 33.55% a. 75,000 b. 80,000
c. 78,000 d. 85,000
20. The net present value on this investment is
closest to: 28. hei wazzupp duuudsss yeehhh weeehhhhh
a. P 300,000 b. P 58,800 taalllaaagagaga hehheheh yiyiyiyiyi hohohohoho
c. P 76,024 d. P 17,550 natatae akkkoo oo break it down is investigating the
purchase of a piece of automated equipment that will
21. The internal rate of return on the investment is be save P 150,000 each year in direct labor and
closest to: inventory carrying costs. This equipment costs P
a. 13% b. 15% 700,000 and is expected to have a five year useful
c. 14% d. 12% life with no salvage value. The company requires a
minimum of 10% return on all equipment purchases.
22. A new machine costing P 40,000 with three years Management anticipates that this equipment will
useful life, no salvage value at the end of three provide intangible benefits such as greater flexibility
years, is expected to bring in the following cash and higher quality output.
inflows after tax:
What peso value per year would the intangible
First year P 30,000 benefits have to have in order to make the
Second year 25,000 equipment an acceptable investment?
Third year 10,000 a. 184,647.85
If the company’s cost of capital is 20%, what is the b. 160,352.15
discounted payback period? c. 34,647.85
a. 1.86 b. 1.87 d. 43,352.15
c. 1.88 d. 1.80
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