Capital Budgeting exercises for FinMan, Quizzes of Financial Management

Download Capital Budgeting exercises for FinMan and more Quizzes Financial Management in PDF only on Docsity! Name: Pamantasan ng Cabuyao Katapatan Homes Subdivision, Brgy. Banay- Banay, City of Cabuyao, Laguna Financial Management Part 1 Capital Budgeting Quiz Score: Course & Section: Date: 1. Capital budgeting is concerned with Boge Decisions affecting only capital intensive industries Analysis of short-range decisions Analysis of long-range decisions Scheduling office personnel in office buildings 2. Of the following decisions, capital budgeting techniques would least likely be used in evaluating the aoge 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 3. The capital budgeting process contains several stages. At which stage are financial and nonfinancial factors addressed? Boge Search stage Selection stage Identification and definition stage Information-acquisition stage 4. At what stage of the capital budgeting process would management most likely apply present value techniques? aoge Search stage Selection stage Financing stage Identification stage 5. The stage of the capital budgeting process that has the most risk is a. b. Forecasting cash flow Evaluating performance and learning 10. c. Identifying alternative possible projects d. Raising funds to initially support the project In equipment-replacement decisions, which one of the following does not affect the decision- making process? Current disposal price of old equipment Operating costs of the old equipment Original fair market value of the old equipment Cost of the new equipment aoge In deciding whether to replace a machine, which of the following is NOT a sunk cost? The expected resale price of the existing machine The book value of the existing machine The original cost of the existing machine The depreciated cost of the existing machine Boge 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%? a. P80,000 b. P88,000 c. P92,000 d. P 100,000 A company is considering replacing a machine with one that will save P 50,000 per year in cash operating costs and has P 20,000 more depreciation expense per year than the existing machine. The tax rate is 40%. Buying the new machine will increase annual net cash flows of the company by a. P38,000 b. P30,000 c. P20,000 d. P 12,000 Legaspi Company is considering replacing a machine with a book value of P 400,000, a remaining useful life of 5 years, and annual straight-line depreciation of P 80,000. The existing machine has a current market value of P 400,000. The replacement machine would cost P 550,000, have a 5-year life, and save P 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? a. P 60,000 b. P 68,000 c. P76,000 d. P84,000 20. Which statement describes the relevance of depreciation in calculating cash flows? Depreciation is relevant only when income taxes exist Depreciation is always relevant Depreciation is never relevant Depreciation is relevant only with discounted cash flow methods aoge 21. Ligao Company is analyzing a capital investment proposal for a new machinery to produce a new product over the next 10 years. At the end of ten years, the machinery must be disposed of with a zero net book value but with a scrap salvage value of P 20,000. It will require some P 30,000 to remove the machinery. The applicable tax rate is 35%. What is the approximate “end-of-life” (terminal) cash flow based on the foregoing information? Inflow of P 30,000 Outflow of P 6,500 Outflow of P 10,000 Outflow of P 17,000 aoe Items 22 and 23 are based on the following information Misibis Corporation is considering the acquisition of a new machine. The machine can be purchased for P 90,000; it will cost P 6,000 to transport to Misibis plant and P 9,000 to install. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of P 5,000. Over its 10- year life, the machine is expected to produce 2,000 units per year, each with a selling price of P 500 and combined material and labor costs of P 450 per unit. Tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Misibis has a marginal tax rate of 40%. 22. What is the net cash flow for the third year of the project that Misibis should use in a capital budgeting analysis? a. P64,200 b. P68,000 c. P68,400 d. P79,000 23. What is the net cash flow for the tenth year of the project that Misibis should use in a capital budgeting analysis? 24, 25. 26. 27. 28. a. P 100,000 b. P91,000 c. P68,400 d. P63,000 Which of the following is irrelevant in projecting the cash flows of the final year of a capital project? a. Cash devoted to use in project. b. Disposal value of equipment purchased specifically for project. c. Deprecation tax shield generated by equipment purchased specifically for project. d. Historical cost of equipment disposed of in the project’s first year. The length of time required to recover the initial cash outlay for a project is determined by using the: a. Discounted cash flow method b. Payback method c. Net present value method d. Simple rate of return method An advantage of using the payback method is that the method is: a. Simple to compute b. Not based on cash flow data c. Precise in estimates of profitability d. Insensitive to the life of the project Iriga Company is considering a certain project with the following projected cash income after taxes for 4 years, the life of the project: year 1, P 11,000; year 2, P 9,000; year 3, P 8,000; year 4, P 7,000. If the project requires an investment of P 25,000 with a salvage value of P 5,000, what is the payback period? a. 2.265 years b. 2.562 years c. 2.526 years d. 2.625 years Albay, Inc. recently acquired a machine at a cost of P 64,000. It will be depreciated on a straight- line basis over 8 years, with no salvage value. Albay expects that this machine will produce P 18,000 annual net cash flow before income tax. Assuming an income tax rate of 50%, the appropriate payback period on this investment is: (Hint: compute cash flow after tax) 29. 30. 31. 32. a. 3.6 years b. 4.9 years c. 7.1 years d. 12.8 years A company is planning to buy a machine that costs P 12,000 and has an annual depreciation for tax purposes of P2,400 for 5 years. The machine is expected to result in cash savings from operations of P 4,000 per year. If the tax rate is 50%, then what is the payback period for the new machine? 3 years 3.75 years 5 years 6 years poe Bulan Company is planning to purchase a new machine. The payback period is estimated to be 6 years. The project’s after tax cash flow is estimated to be P 2,000 yearly for the first three years and P 3,000 yearly for the next three years of the payback period. Annual depreciation of P 1,300 will be charged to income for each of the 6 years of the payback period. The machine will cost: a. P 15,000 b. P12,000 c. P9,000 d. P6,000 Oas Company is planning to purchase a new machine for P 30,000. 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 P 7,000 per year in each of the next three years and P 5,500 in the fourth year. Depreciation of P 5,000 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 produce in the last (fifth) year of the payback period? a. P 1,000 b. P3,500 c. P5,000 d. P8,500 The payback period considers depreciation expense (DE) and time value of money (TMV) as follows: DE, relevant and TVM, relevant DE, irrelevant and TVM, irrelevant DE, irrelevant and TVM, relevant DE, relevant and TVM, irrelevant Boge The company’s cost of capital is 16%. The PV of P 1 for one year at 16% is 0.862; for two years is 0.743; for three years is 0.641. What is the break-even time or discounted (PV) payback period? a. 1.7 years b. 2 years c. 2.3 years d. 2.7 years 42. Which capital budgeting method assumes that the funds are reinvested at the company’s cost of capital? a. Payback b. Accounting rate of return c. Net present value d. Time adjusted rate of return 43. You have been consulted to advise Polangui Corp. on the projected acquisition of another production line costing P 1 million. The line has an expected useful life of five (5) years without any salvage value. The following additional information was made available: Year Estimated Annual Cash Inflow Present Value of P 1 1 P 600,0000 91 2 300,0000 76 3 200,0000 63 4 200,0000 53 5 200,000 0.44 TOTAL P.1,500,000 3.27 Assuming that the cash flow is to be discounted, your advice is To invest due to net present value of P 541,280 To invest due to net present value of P 94,000 To invest due to net advantage of P 500,000 To invest due to net present value of P 635,000 Boge 44. Labo Company purchased a machine with an estimated useful life of seven years and no salvage value. The machine is expected to generate cash flows from operations, net of income taxes of P 80,000 in each of the seven years. Labo’s expected rate of return is 12%. Information on present value factors is as follows: Present value of P 1 at 12% for seven periods: 0.452 Present value of an ordinary annuity of P 1 at 12% for 7 periods: 4.564 Assuming a positive net present value of P 12,720, what is the cost of the machine? 45. 46. 47. a. P 240,400 b. P 253,120 c. P352,400 d. P377,840 An investment opportunity costing P 110,000 is expected to yield net cash flows of P 28,000 annually for six years. The NPV of the investment at a cutoff rate of 12% would be: (Round off PV factors based on three decimal places) a. (P 5,108) b. P5,108 c. P 110,000 d. P115,108 The effectiveness of the present value method has been appropriately questioned as a capital expenditure evaluation technique because: Boge perform Predicting future cash flows is often difficult and often associated with uncertainties The average return on investment method is more accurate and useful The payback method is theoretically more reliable The computation involves difficult mathematical applications most accountants cannot 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 P 1 @ 10% Future value of P 1 @ 10% P 8,0000 91 1.10 P.9,0000 83 1.21 P 10,0000 75 1.33 All cash inflows are assumed to occur at year-end. If the asset generates a positive net present value of P 2,000, what was the amount of the original investment? Boop P 20,250 P 22,250 P 30,991 P 33,991 48. Ignoring taxes, how are the following used in the calculation of the NPV of a proposed project? 49. 50. Depreciation Expense Salvage Value a. Include Include b. Include Exclude c. Exclude Include d. Exclude Exclude Pilar acquired a machine that has a useful life of 10 years with no salvage value. The incremental annual net income before taxes is P 8,500. Income taxes are 25%. The PV of an annuity of P 1 for 10 years at 18% is 4.494. The annual depreciation is P 5,000. The NPV is positive P 1,119.25. How much is the amount of investment? a. P 30,000 b. P 40,000 c. P50,000 d. P60,000 A decrease in the discount rate: Will increase present values of future cash flows Is one way to compensate for greater risk in a project Will reduce present values of future cash flows Responses a and b are both correct Boge