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Question 1
Buhi Co. is studying a project that would have a ten-year life and would require a P800,000 investment
in equipment that has no salvage value. The project would provide net operating income each year as
follows for the life of the project:
Sales P 500,000
Less: Cash variable expenses 100,000
Contribution margin P 400,000

Less: Fixes expenses

Fixed cash expenses P 200,000

Depreciation 80,000 280,000

Net operating income P 120,000
The company’s required rate of return is 8%. What is the payback period for this project?
 a. 3 years
 b. 6.67 years
 c. 2 years
 Selected: d. 4 years This answer is correct.

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Question 2
The technique that does not use cash flow for capital investment decisions.
 a. Payback
 Selected: b. ARR This answer is correct.
 c. NPV
 d. IRR
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Question 3
Which of the following groups of capital budgeting techniques uses the time value of money?
 a. IRR, payback and NPV
 b. Book rate of return, payback and profitability index
 c. IRR, ARR and profitability index
 Selected: d. IRR, NPV and profitability index This answer is correct.

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Question 4
The present value of P50,000 due in five years would be highest if discounted at a rate of
 a. 10%
 Selected: b. 0% This answer is correct.
 c. 20%
 d. 15%
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Question 5
A project’s salvage value, realizable at the end of life of the project, is considered in the computation of
the net investments for decision making process.
 True
 Selected: False This answer is correct.

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Question 6
Old equipment with a book value of P15,000 will be replaced by new equipment with a purchase price
of P50,000, exclusive of freight charges of P2,000. The market value of the old equipment is P11,000.
Repairs costs of P2,000 can be avoided if the new equipment is acquired. Assume a tax rate of 35%.
What is the initial (net) investment of the project?
 Selected: a. 38,300 This answer is correct.
 b. 39,700
 c. 33,800
 d. 52,000
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Question 7
For P450,000, Camarines Corp. purchased a new machine with an estimated useful life of five years with
no salvage value. The machine is expected to produce cash flow from operations, net of 40% income
taxes, as follows
1st year P 160,000
2nd year 140,000
3rd year 180,000
4th year 120,000
5th year 100,000
Camarines Corp. will use the sum-of-years-digits’ method to depreciate the new machine:
1st year P 150,000
2nd year 120,000
3rd year 90,000
4th year 60,000
5th year 30,000
The present value of P1 for 5 periods at 12% is 3.60478. The present value of P1 at 12% at the end of each
period are:
1st year 0.89280
2nd year 0.79719
3rd year 0.71178
4th year 0.63552
5th year 0.56743
Had Camarines used the straight-line method of depreciation, what is the difference in net present value
provided by the machine at a discount rate of 12%?

 Selected: a. Decrease of P9,750 This answer is correct.

 b. Decrease of P24,376
 c. Increase of P24,376
 d. Increase of P9,750
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Question 8
Nabua Co. is considering replacing a machine with a book value of P200,000, a remaining useful life of 5
years, and annual straight-line depreciation of P40,000. The existing machine has a current market value
of P200,000. The replacement machine cost P300,000, have a 5-year life, and save P100,000 per year in
cash operating costs. The replacement machine would be depreciated using the straight-line method
and the tax rate is 40%. What would be the increase in annual net cash flow if the company replaces the
machine?
 a. 84,000
 b. 60,000
  c. 76,000
 Selected: d. 68,000 This answer is correct.

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Question 9
The Baao Co. is considering an investment that has the following data:
Years 1 2 3 4 5

Investment P 8,000 P 2,000

Cash inflow 2,000 2,000 P 5,000 P 4,000 P 4,000
The payback period for this investment is
 a. 4 years
 b. 4.5 years
 c. 3 years
 Selected: d. 3.5 years This answer is correct.

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Question 10
Tabaco Co. has 5% preferred stock with a par value of P100. Selling price is P123.50 per share and
flotation costs are P0.50 per share. The company’s tax rate is 20%. What is the cost of preferred stock?
Hint: Yield : Dividend yield = Dividend per share / Market price per share (net of flotation cost)
 a. 4.03%
 b. 4.7%
 Selected: c. 4.07% This answer is correct.
 d. 5%
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Question 11
Annual cash inflows from the capital projects are measured in terms of
 Selected: a. Income before depreciation but not taxes This answer is correct.
 b. Income before depreciation and taxes
 c. Income after depreciation but before taxes
 d. Income after depreciation and taxes
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Question 12
The payback period emphasizes the profitability of a capital project while the accounting rate of return,
on the other hand, emphasizes the project’s liquidity.
 True
 Selected: False This answer is correct.

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Question 13
Naga Co. is considering sale of a machine with a book value of P80,000 and 3 years remaining in its
useful life. Straight-line depreciation of P25,000 annually is available. The machine has a current market
value of P100,000. What is the cash flow from selling the machine if the tax rate is 40%?
 a. 100,000
 b. 88,000
 c. 80,000
 Selected: d. 92,000 This answer is correct.

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Question 14
Virac Inc. is planning to invest P120,000 in a 10-year project. Virac estimates that the annual cash inflow,
net of income taxes, from this project will be P20,000. Virac’s desired rate of return on investments of
this type is 10%. Information on present value factors is as follows:
@ 10% @12%
Present value of P1 for 10 period 0.386 0.322

Present value of annuity of P1 for 10 periods 6.145 5.560

Virac’s internal rate of return on this investment is

 a. 12%
 b. 10%
 Selected: c. Less than 12% but not more than 10% This answer is correct.
 d. Less than 10% but not more than 0%
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Question 15
Guinobatan management is considering an advertising program that would require an initial
expenditure of P165,500 and bring in additional sales over the next five years. The cost of advertising is
immediately recognized as expense. The projected additional sales revenue in year 1 is P75,000, with
associated expenses of P25,000. The additional sales revenue and expenses from the advertising
program are projected to increase by 10 percent each year. Guinobatan’s tax rate is 40%. The present
value of P1 at 10%, end of each period:
Periods Present value factors
1 0.90909
2 0.82645
3 0.75131
4 0.68301
5 0.62092
The net present value of the advertising program would be approximately

 a. (29,136)
 b. (37,064)
 Selected: c. 37,064 This answer is correct.
 d. 29,136
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Question 16
The market value of Bato Co.’s common stock (book value: P65M) is estimated at P60M and the market
value of its interest bearing debt (book value: P35M) is estimated at P40M. The average before tax yield
on these liabilities is 15% per year. Income taxes are 40%. The company is expected to pay a dividend of
P10 per share and the stock is selling at a price of P100 per share. The growth rate of dividend is
projected to be 2.5% per year. What is the weighted average cost of capital (WACC) of the company as a
whole?
 Selected: a. 11.2% This answer is correct.
 b. 9%
 c. 21.5%
 d. 25%
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Question 17
Pilar Inc. acquired a turning machine that has a useful life of 10 years with no salvage value. The
incremental annual net income before taxes is P8,500. Income taxes are 25% each year. The PV of an
annuity of P1 for 10 years at 18% (the company’s cost of capital) is 4.494. The annual depreciation is
P5,000. The NPV is positive P1,119.25. How much is the amount of the investment?
 a. 60,000
 b. 40,000
 c. 30,000
 Selected: d. 50,000 This answer is correct.

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Question 18
When computing for the accounting rate of return (ARR), which of the following is used?
 Selected: a. Income after depreciation and taxes This answer is correct.
 b. Income after depreciation but before taxes
 c. Income before depreciation but not taxes
 d. Income before depreciation and taxes
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Question 19
Sta. Elena Co. is considering two projects, A and B. The following information has been gathered on
these projects:
Project A Project B

Initial investment needed P 40,000 P

60,000

Present value of future cash

flows 60,000 85,000

Useful life 4 years 4

years
Based on the information, which of the following statement(s) is(are) true?
I. Project A has the higher ranking according to the profitability
index criterion.
II. Project B has the higher ranking according to the net present
value criterion.
 a. Only II
 b. Neither I nor I
 c. Only I
 Selected: d. Both I and II This answer is correct.

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Question 20
A project costing P28,715 will produce the following cash benefits after taxes:
End of Year After-tax cash benefits
1 P 11,000
2 15,000
3 18,000
The company’s cost of capital is 16%. The PV of P1 for one year at 16% is 0.862; for two years is 0.743;
for three years is 0.641. What is the discounted (PV) payback period?
 Selected: a. 2.7 years This answer is correct.
 b. 2.3 years
 c. 1.7 years
 d. 2 years
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Question 21
Which of the following combinations is possible?
To: Profitability Index; NPV; IRR (respectively)
 a. Greater than 1; Negative; Less than cost of capital
 b. Greater than 1; Positive; Equals cost of capital
 Selected: c. Less than 1; Negative; Less than cost of capital This answer is correct.
 d. Less than 1; Positive; Less than cost of capital
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Question 22
A company is considering a capital investment for which the initial cash outlay is P20,000. Net cash flows
from operations, net of income taxes, are predicted to be P4,000 for 10 years. Assume a cost of capital
of 12%. The present value of an annuity of P1 for 10 years at various rates are as follows:
Discount rate PV factor

14% 5.216

15% 5.018

16% 4.833

17% 4.658
What is the company’s internal rate of return?
 a. 15.4%
 b. 15.3%
 Selected: c. 15.1% This answer is correct.
 d. 15.2%
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Question 23
The net present value method assumes that the project’s cash flows are reinvested at the
 a. Simple rate of return
 b. Internal rate of return
 c. Payback period
 Selected: d. Cost of capital This answer is correct.

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Question 24
As the discount rate increases
 a. Present value factor increase
 b. It is impossible to tell what happens to the factors
 Selected: c. Present value factor decrease This answer is correct.
 d. Present value factors remain constant
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Question 25
If an investment of P14,760 now is to yield P18,000 at the end of one year, then the internal rate of
return for this investment to the nearest whole percentage is
 a. 14%
 b. 18%
 Selected: c. 22% This answer is correct.
 d. 28%
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Question 26
Albay Inc. recently acquired a machine at a cost of P64,000. It will be depreciated on a straight-line basis
over 8 years, with no estimated salvage value. Albay estimates that this machine will product P18,000
annual net cash flow before income tax. Assuming an income tax rate of 50%, the appropriate payback
period in this investment is: (Hint: compute cash flow after tax first)
 a. 7.1 years
 b. 12.8 years
 Selected: c. 4.9 years This answer is correct.
 d. 3.6 years
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Question 27
A company is considering the purchase of an investment that has a positive net present value based on a
discount rate of 12%. The internal rate of return would be
 a. 12%
 b. Less than 12%
 Selected: c. Greater than 12% This answer is correct.
 d. Zero
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Question 28
An investment with a positive NPV also has
 a. A positive profitability index
 Selected: b. A profitability index greater than one This answer is correct.
 c. A profitability index of one
 d. A profitability index less than one
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Question 29
Which one of the following method is a project ranking method rather than a project screening method?
 a. Simple rate of return
 b. Sophisticated rate of return
 c. Net present value
 Selected: d. Profitability index This answer is correct.

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Question 30
The internal rate of return method assumes that the project’s cash flows are reinvested at the
 a. Payback period
 b. Simple rate of return
 Selected: c. Internal rate of return This answer is correct.
 d. Required rate of return
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Question 31
Daet Inc.’s depreciation deduction last year was P50,000 and its tax rate was 30%. The company’s tax
savings from the depreciation tax shield for the year was
 a. 30,000
 b. 30,000
 Selected: c. 15,000 This answer is correct.
 d. 50,000
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Question 32
Discount rate is 12.5%; economic life in years = 3 years; PV annuity factor for 3 years:
_
(Use only numerical values, rounded to three decimal places: e.g., 1,234.)
Discount rate is 12.5%; economic life in years = 3 years; PV annuity factor for 3 years:
.4200Incorrect.
(Use only numerical values, rounded to three decimal places: e.g., 1,234.)
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Question 33
On January 1, a company invested in an asset with a useful life of 3 years. The company’s expected rate
of return is 10%. The cash flow and present and future value factors for the 3 years are as follows:
Year Cash inflows Present value of P1 @ 10% Future
value of P1 @ 10%
1 P 8,000 0.91
1.10
2 9,000 0.83
1.21
3 10,000 0.75 1.33
All cash inflows are assumed to occur at year-end. If the asset generates a positive net present value of
P2,000, what was the amount of the original investment?
 Selected: a. 20,250 This answer is correct.
 b. 30,991
 c. 33,991
 d. 22,250
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Question 34
Sabang Co. purchases a new machine on January 1 of this year for P90,000, with an estimated useful life
of 5 years and salvage value of P10,000. The machine will be depreciated using the straight-line method.
The machine is expected to produce cash flow from operations, net of tax, of P36,000 a year in each of
the next 5 years. The new machine’s salvage value is P20,000 in years 1 and 2, and P15,000 in years 3
and 4. What will be the bailout payback period for this machine?
 a. 1.4 years
 b. 3.4 years
 c. 2.2 years
 Selected: d. 1.9 years This answer is correct.

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Question 35
Lagonoy Inc. purchased a new machine for P60,000 on January 1. The machine is being depreciated on
the straight-line basis over the five years with no salvage value. The simple rate of return is expected to
be 15% on the initial investment. Assuming a uniform cash flow, this investment is expected to provide
annual cash flow from operations of
 a. 7,200
 b. 13,800
 Selected: c. 12,000 This answer is incorrect.
 d. 21,000
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Question 36
If the IRR on an investment is zero,
 a. Its NPV is positive
 b. Its cash flows decrease over its life
 Selected: c. Its annual cash flows equal its required investment This answer is correct.
 d. It is generally a wise investment
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Question 37
The PV factors of any amount at year zero or zero percent is always equal to
 a. 0.50
 b. Zero
 c. An amount that cannot be determined without more information
 Selected: d. 1.00 This answer is correct.

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Question 38
Cost of capital is 3%; economic life in years = 4 years; simple PV factor for year 4:
_
(Use numeric values only, rounded to three decimal places: e.g., 1.234.)
Cost of capital is 3%; economic life in years = 4 years; simple PV factor for year 4:
0.888Correct.
(Use numeric values only, rounded to three decimal places: e.g., 1.234.)
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Question 39
Oas Co, is planning to purchase a new machine for P30,000. The payback period is expected to be five
years. The new machine is expected to produce cash flows from operations, net of income taxes, of
P7,000 per year in each of the next three years and P5,500 in the fourth year. Depreciation of P5,000 a
year will be charged to income for each of the five years of the payback period. What is the amount of
cash flow from operations, net of income taxes, that the new machine is expected to product in the last
(fifth) year of the payback period?
 a. 1,000
 b. 8,500
 Selected: c. 3,500 This answer is correct.
 d. 5,000
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Question 40
A company is investigating the possibility of acquiring a machine that will cost P12,000 and will have
annual depreciation for tax purposes of P2,400 for 5 years. The machine is expected to result in cash
savings from operations of P4,000 per year. If the tax rate is 50%, what is the payback period for the
new machine?
 a. 3 years
 b. 3.5 years
 c. 5 years
 Selected: d. 3.75 years