Finman Midterms Part 1

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At the Bartholomew Company last year all sales were for cash and all expenses were

paid in cash. The tax rate was 30%. If the after-tax net cash inflow from these
operations last year was $10,500, and if the total before tax cash expenses were
$35,000, then the total before-tax cash sales must have been: *

$65,000

$60,000

$45,000

$50,000

APJ, Inc. is planning to purchase a new machine that will take six years to recover
the cost. The new machine is expected to produce cash flow from operations, net of
income taxes, of P4,500 a year for the first three years of the payback period and
P3,500 a year of the last three years of the payback period. Depreciation of P3,000 a
year shall be charged to income of the six years of the payback period. How much
shall the machine cost? *

12,000

18,000

24,000

36,000

The payback method assumes that all cash inflows are reinvested to yield a return
equal to *

the discount rate.

the hurdle rate.

the internal rate of return.

zero.

Beta Company plans to replace its company car with a new one. The new car costs
P120,000 and its estimated useful life is five years without scrap value. The old car
has a book value of P15,000 and can be sold at P12,000. The acquisition of the new
car will yield annual cash savings of P20,000 before income tax. Income tax rate is
25%. The net investment of the new car is_______ *
P108,000

P108,750

P107,250

P107,000

Superstrut is considering replacing an old press that cost $80,000 six years ago with
a new one that would cost $245,000. The old press has a net book value of $15,000
and could be sold for $5,000. The increased production of the new press would
require an investment in additional working capital of $6,000. The company's tax rate
is 40%. Superstrut's net investment now in the project would be: *

$256,000

$242,000

$250,000

$245,000

Beta Company plans to replace its company car with a new one. The new car costs
P120,000 and its estimated useful life is five years without scrap value. The old car
has a book value of P15,000 and can be sold at P12,000. The acquisition of the new
car will yield annual cash savings of P20,000 before income tax. Income tax rate is
25%. The payback period of the investment is *

5.14 years

5.18 years

5.11 years

5.095 years

Sweets, Etc., Inc. plans to undertake a capital expenditure requiring P2 million cash
outlay. Below are the projected after-tax cash inflow for the five-year period covering
the useful life. The company’s tax rate is 35%.Year 1=600, Year 2= 700, Year 3=480,
Year 4=400, Year 5=400. The founder and president of the candy company believes
that the best gauge for capital expenditure is cash payback period and that the
recovery period should not be more than 75% of the useful life of the project or the
asset. Should the company undertake the project? *

No, since the payback period is 4 years or 80% of the useful life of the project.
Yes, since the payback period is 3.55 years or 71% of the useful life of the project.

No, since the payback period extends beyond the life of the project.

Yes, since the payback period is 4 years and still shorter than the useful life of the project.

Guemon Company is taking into account the replacement of an old machine now in
use with a new machine costing P100,000. The replacement is expected to produce
an annual cash savings of P22,500 before income taxes.The estimated useful life of
the new machine is ten years with no residual value. The book value of the old
machine is P37,500 and is expected to last for another five years. It is being
depreciated at P8,000 per year. The income tax rate is 25%.The annual cash savings
after tax is *

P15,375

P16,875

P17,375

P20,520

The following statements refer to the accounting rate of return (ARR): 1.The ARR is
based on the accrual basis, not cash basis. 2. The ARR does not consider the time
value of money. 3. The profitability of the project is considered. 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.

Of the following decisions, capital budgeting techniques would least likely be used in
evaluating the *

Acquisition of new aircraft by a cargo company

Trade for a star quarterback by a football team

Design and implementation of a major advertising program

Adoption of a new method of allocating non-traceable costs to product lines

Regal Industries is replacing a grinder purchased 5 years ago for $15,000 with a new
one costing $25,000 cash. The original grinder is being depreciated on a straight-line
basis over 15 years to a zero salvage value. Regal will sell this old equipment to a
third party for $6,000 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 purchase if the old grinder is sold and the
new one is purchased is *

$19,000

$25,000

Other: 17400

In capital expenditures decisions, the following are relevant in estimating operating


costs except *

Future costs.

Cash costs.

Differential costs.

Historical costs.

Acme is considering the sale of a machine with a book value of $80,000 and 3 years
remaining in its useful life. Straight-line depreciation of $25,000 annually is available.
The machine has a current market value of $100,000. What is the cash flow from
selling the machine if the tax rate 40%. *

$25,000

$80,000

$92,000

$100,000

Great Value Company is planning to purchase a new machine costing P50,000 with
freight and installation costs amounting to P1,500. The old unit is to be traded-in will
be given a trade-in allowance of P7,500. Other assets that are to be retired as a result
of the acquisition of the new machine can be salvaged and sold for P3,000. The loss
on retirement of these other assets is P1,000 which will reduce income taxes of
P400. If the new equipment is not purchased, repair of the old unit will have to be
made at an estimated cost of P4,000. This cost can be avoided by purchasing the
new equipment. Additional gross working capital of P12,000 will be needed to
support operation planned with the new equipment.The net investment assigned to
the new machine for decision analysis is *

P50,200

P52,600

P53,600

P57,600

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
*

P2,450,000

P2,425,000

P2,600,000

P2,250,000

Key Corp. plans to replace a production machine that was acquired several years
ago. Acquisition cost is P450,000 with salvage 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 *

P540,000

P610,000

P660,000

P800,000
Naga Company is considering the sale of a machine with a book value of P 80,000
and 3 years remaining in its useful life. Straight-line depreciation of P 25,000
annually is available. The machine has a current market value of P 100,000. What is
the cash flow from selling the machine if the tax rate is 40%? *

80,000

88,000

92,000

100,000

Lyben Inc. is planning to produce a new product. To do this, it is necessary to acquire


a new equipment that will cost the company P100,000. The estimated life of the new
equipment is five years with no salvage value. The estimated income and costs
based on expected sales of P10,000 units per year are: Sales @ P10.00 per unit
P100,000 Costs @ P8.00 per unit 80,000 Net income P 20,000 The accounting rate of
return based on initial investment is 20%. What will be the accounting rate of return
based on initial investment of P100,000 if management decrease its selling price of
the new product by 10%? *

5%

10%

15%

20%

Hatchet Company is considering replacing a machine with a book value of $400,000,


a remaining useful life of 5 years, and annual straight-line depreciation of $80,000.
The existing machine has a current market value of $400,000. The replacement
machine would cost $550,000, have a 5-year life, and save $75,000 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? *

$90,000

$150,000

$330,000
$550,000

Capital budgeting is concerned with *

Decisions affecting only capital intensive industries

Analysis of short-range decisions

Analysis of long-range decisions

Scheduling office personnel in office buildings

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