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Capital Budgeting Decision

Practice problem

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102 views3 pages

Capital Budgeting Decision

Practice problem

Uploaded by

hnnhreginaldo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Capital Budgeting Decision

1. Carol Harrison is considering an investment in a retail shopping mall. The initial investment is
P400,000. She expects to receive cash income of P80,000 a year. What is the payback period?
a. 4 year
b. 3.5 years
c. 5 years
d. 2.5 years
e. 6 years

2. Elena Wallace invested P150,000 in a project that pays her an even amount per year for 10 years. The
payback period is 6 years. What are Elena's yearly cash inflows from the project?
a. P150,000
b. P15,000
c. P25,000
d. P90,000
e. Cannot be determined from this information.

3. Tessa Wilson invested in a project with a payback period of 6 years. The project brings P18,000 per
year for a period of 9 years. What was the initial investment?
a. P108,000
b. P107,500
c. P162,000
d. P240,000
e. Cannot be determined from this information.

4. An investment of P5,000 provides an average net cash flows of P320 with zero salvage value.
Depreciation is P35 per year. The accounting rate of return using the original investment is
a. 4.0%
b. 5.1%
c. 5.7%
d. 3.2%
e. 2.4%

5. Buster Evans is considering investing P20,000 in a project with the following annual cash revenues
and expenses:

Cash Cash
Revenues Expenses
Year 1 P 8,000 P 8,000
Year 2 P12,000 P 8,000
Year 3 P15,000 P 9,000
Year 4 P20,000 P10,000
Year 5 P20,000 P10,000

Depreciation will be $4,000 per year.

What is the accounting rate of return on the investment?


a. 15%
b. 35%
c. 70%
d. 75%
e. None of these.

6. Coriander Company is considering a project with an initial investment of P426,800 in new equipment
that will yield annual net cash flows of P80,000, and will be depreciated at P53,350 per year over its
eight year life. What is the accounting rate of return?
a. 320%
b. 18.74%
c. 6.24%
d. 31.27%
e. 50.0%

7. Jackson Company invests in a new piece of equipment costing P40,000. The equipment is expected to
yield the following amounts per year for the equipment's four-year useful life:

Cash revenues P 60,000


Cash expenses (32,000)
Depreciation expenses (straight-line) (10,000)
Income provided from equipment P 18,000

Cost of capital 14%

What is the net present value of this investment in equipment?


a. P81,592
b. P41,592
c. P(4,480)
d. P52,452

8. The following information pertains to an investment:

Investment P140,000
Annual revenues P 96,000
Annual variable costs P 32,000
Annual fixed out-of-pocket costs P 20,000
Discount rate 12%
Expected life of project 8 years

The present value of the annual cash flow (rounded) is


a. P136,822.
b. P152,538.
c. P204,884.
d. P218,592.

9. A firm is considering a project with an annual cash flow of P200,000. The project would have a seven
year life, and the company uses a discount rate of 10%. What is the maximum amount the company
could invest in the project and have the project still be acceptable?
a. P718,200
b. P1,400,000
c. P973,600
d. P200,000

10. Jones Company is considering the purchase of a new machine for P57,000. The machine would
generate an annual cash flow of $17,411 for 5 years. At the end of five years, the machine would have
no salvage value. The company's cost of capital is 12%. The company uses straight-line depreciation.

What is the internal rate of return for the machine rounded to the nearest percent?
a. 12%
b. 18%
c. 14%
d. 16%

11. A firm is considering a project requiring an investment of P27,000. The project would generate an
annual cash flow of P6,296 for the next seven years. The company uses the straight-line method of
depreciation. The approximate internal rate of return for the project is
a. 6%.
b. 8%.
c. 12%.
d. 14%.

12. Cooper Industries is considering a project that would require an initial investment of P101,000. The
project would result in cost savings of P62,000 in year 1 and P70,000 in year two. The internal rate of
return is
a. between 16% and 17%.
b. between 18% and 20%.
c. under 15%.
d. none of these.

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