Problems

Problems
Problem: Net Investment

The management of Shantal Company plans to replace a sorting machine that was acquired several years ago at a cost
P50,000. The machine has been depreciated to its salvage value of P5,000. A new sorter can be purchased for P60,000.
The old machine can be sold for P6,000. If a new machine is not purchased, Shantal Company will spend P20,000 to
repair the old machine. The cost to repair the old machine can be deducted in the first year to compute income tax.
Income tax is estimated at 40% of the income subject to tax. Assume also that the acquisition of the new machine will
require additional investment in working capital of P10,000.
Compute the net investment in the new machine for decision making purposes.
Problem 2
Viray, Inc. is considering an investment of P2 million in a new product line. Depreciation of P200,000 is to be
deducted in each of the next ten years (salvage value is estimated at zero). A selling price of P40 per unit is decided
upon; unit variable cost is P18, and fixed operating costs, excluding depreciation are estimated at P400,000 per year.
The sales division believes that a sales estimate of 50,000 units per year is realistic. Income tax is estimated at 30% of
income before tax.
Determine the annual net cash inflows and net returns (net income) for the proposed investment project.
Problem 3
Itable, Inc. uses a labor-intensive manufacturing process. Existing equipment has a book value of P20,000, a five-year
remaining life, and a P25,000 market value. Cash operating costs is P75,000. The proposed process requires
machinery costing P120,000 with a useful life of five years and no salvage value. The new machinery, which will
replace the old one, requires P35,000 in annual cash costs. The tax rate is 30% and the cost of capital is 12%.
Determine the net investment and annual net cash inflow on the new equipment.
Problem 1 - Even Cash Flow

Aquino plans to purchase a piece of equipment which amounts to P210,000 in accordance with an investment proposal
from a member of his staff. If the equipment is bought, it is expected to generate an annual cash inflow of P55,000. A
four-year payback period is acceptable to Aquino.
Year
1 55,000
2 55,000
3 55,000
4 55,000
5 55,000
6 55,000
Determine payback period, payback reciprocal, accounting rate of return
Problem 2 Uneven Cash Flow

Aquino plans to purchase a piece of equipment which amounts to P210,000 in accordance with an investment proposal
from a member of his staff. If the equipment is bought, it is expected to generate cash inflow as shown below. A four-
year payback period is acceptable to Aquino.
Year
1 30,000
2 40,000
3 50,000
4 60,000
5 180,000
6 290,000
Determine the payback period and accounting rate of return.
Problem 3
Tina's initial investment on Project A is P100,000. Its estimated useful life is 20 years. Cash inflow per year is
P17,500. What is the ARR?
Prob4
A company purchased a new machine on January 1 of this year for P45,000, with an estimated useful life pf 5 years
and a salvage value of P5,000. The machine will be depreciated using the straight-line method. The machine is
expected to produce cash flow from operations, net of income taxes, of P18,000 a year in each of the next five years.
The new machine's salvage value is P10,000 in years 1 and 2, and P7,500 in years 3 and 4.
Compute the bail-out period for this new machine.
P5
Mr. Hopia plans to put up a small stall in front of his house. The overall cost of the construction is P180,000. The stall
is expected to generate cash inflow for 7 years as shown below. A four-year discounted payback period is acceptable
to Mr. Hopia. (WACC is 12%)
P6
Mr. Hopia plans to put up a small stall in front of his house. Th overall cost of the construction is P180,000. The stall
is expected t generate cash inflow for 7 years as shown below. A four-year discounte payback period is acceptable to
Mr. Hopia. (WACC is 12%)
Year Annual Cash Returns
1 40,000
2 50,000
3 60,000
4 80,000
5 80,000
6 70,000
7 60,000
Prob 7
Apostol Company purchased a new machine for P50,000 to expand capacity. Sales are expected to increase by 20%.
The only additional fixed expense is the depreciation on the new machine (straight-line over five years with no
salvage value). The income statement for the past year is:
Sales 300,000
Variable Expenses (180,000)
Fixed Expenses (100,000)
Income Before Tax 20,000
Tax (6,000)
Net Income 14,000
Required:
1. What is the expected annual after-tax cash inflow from the new machine?
2. Compute the payback period
3. Find the net present value (NPV) using a hurdle rate of 15%
Problem 8
Assume the ff cash returns for Projects A and B with the cost capital of 10%
Year Project A Project B
0 (P2,000) (P2,000)
1 200 900
2 400 700
3 600 600
4 700 400
5 900 200

Problems - Capital Budgeting

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Problems - Capital Budgeting

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Problem: Net Investment

Problem 1 - Even Cash Flow

Problem 2 Uneven Cash Flow

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