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Finman Chapter 8

The document provides 25 multiple choice problems related to capital budgeting techniques. The problems cover calculating payback period, accounting rate of return, net present value, profitability index, and internal rate of return for evaluating potential capital investments.

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Maria Kathreena Andrea Adeva
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117 views4 pages

Finman Chapter 8

The document provides 25 multiple choice problems related to capital budgeting techniques. The problems cover calculating payback period, accounting rate of return, net present value, profitability index, and internal rate of return for evaluating potential capital investments.

Uploaded by

Maria Kathreena Andrea Adeva
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Adeva, Maria Kathreena Andrea H.

BSA 2-11

Chapter 9: Capital Budgeting

MC Problems

1 Daniel Corporation
Net cash inflow
Initial
Year Investment Each year Cumulative
0 - 105,000 0 - 105,000
1 50,000 - 55,000
2 45,000 - 10,000
3 40,000 30,000

Payback period = 2 + (10,000 ÷ 40,000) = 2.250 years

2 Net income (Year 1 - 5) 95,000


Divide by 5
Average annual profit 19,000
Divide by initial investment 105,000
Accounting rate of return 18.10%

PV of cash
3 Year Cash inflow PV of 1.00 inflow
1 50,000 × 0.81 40,500
2 45,000 × 0.65 29,250
3 40,000 × 0.52 20,800
4 35,000 × 0.42 14,700
5 30,000 × 0.34 10,200
PV of future cash inflow 115,450
Initial Investment 105,000
Net present value - positive 10,450

4 PV of future cash inflow:


Cash inflow 56,000
PV of an annuity of 1 2.531 141,736
Initial investment 140,000
Net present value - positive 1,736

5 PV of future cash inflow:


Cash inflow 20,000
PV of an annuity 2.5313 50,626
Divide by initial investment 50,000
Profitability index 1.01

6 Initial investment 68,337


Divide by annual cash inflow 27,000
PV of an annuity 2.531
*closest to 9%

7 Cash inflow 30,000


PV of an annuity [1- (1.10)^-3] / 0.10 2.487
PV of future cash inflow 74,610

8 Net investment cost 400,000


Divide by annual net cash inflow 100,000
Cash payback period - Project S 4

9 PV of future cash inflow:


Cash inflow 142,000
PV of an annuity of 1 4.355 618,410
Initial investment 600,000
Net present value - Project P 18,410

10 Annual net income 20,000


Divide by average investment 200,000
Annual rate of return - Project S 10%

11 Initial investment - Project P 600,000


Divide by annual cash inflow 142,000
PV of an annuity 4.225
*closest to 11%

12 Annual net income:


Annual revenues 90,000
OPEX -38,000
Annual depreciation -40,000 12,000
Divide by average investment 160,000
Annual rate of return 7.5%

13 Initial investment cost 320,000


Divide by annual net cash inflow:
Annual revenue 90,000
OPEX 38,000 52,000
Cash payback period 6.2

14 Annual net income 60,000


Divide by average investment 200,000
Annual rate of return 30%

15 Initial investment cost 80,000


Salvage value 4,000
Total 84,000
Divide by 2 2
Average investment (or the denominator) 42,000

16 Year 1 100,000 × 0.870 87,000


Year 2 160,000 × 0.756 120,960
Maximum amount Rod should invest 207,960

17 Year 1 15,000 × 0.88 13,200


Year 2 15,000 × 0.77 11,550
Year 3 10,000 × 0.67 6,700
Present value of future cash flows 31,450

18 Net investment cost 200,000


Divide by annual net cash outflow 40,000
Cash payback period 5

19 Annual savings 24,600


Multiply by PV of annuity of 1 3.605
Total 88,683

20 Net investment cost 600,000


Divide by annual net cash inflow 225,000
Cash payback period 2.67

21 Initial investment 30,000


Divide by annual cash inflow 7,300
PV of an annuity 4.110
*closest to 12%

22 PV of future cash inflow:


Cash inflow 7,300
PV of an annuity of 1 4.355 31,792
Initial investment 30,000
Net present value - positive 1,792

23 PV of future cash inflow:


Cash inflow 7,300
PV of an annuity 4.355 31,792
Divide by initial investment 30,000
Profitability index 1.06

24 Savings in labor cost 8,000


Less: power costs 1,000
Net cost savings 7,000
Multiply by PV factor for 12% for 10 years 5.65
Present value of the net annual cost savings 39,550

25 PV of future cash inflow - see no. 24 39,550


Initial investment 30,000
Net present value - positive 9,550

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