NET INITIAL INVESTMENT OR PROJECT COST
If not subject sa Income Tax:
Purchase price (New) 96,000
Additional Cash outlay 0
Additional Working capital 50,000
Total 146,000
Proceeds from disposal of old assets -16,000
Avoidable costs -6,000
Net Invesment 124,000
If subject sa Income tax yung gain/losses:
Given:
New Machine = 500,000 Carrying Amount 150,000
Carrying Amount = 150,000 Selling Prince -100,000
Selling Price = 100,000 Loss 50,000
Income Tax rate = 30%
Additonal cost to prepare asset = 60,000
Additional working capital = 5,000
Trade-in Allowance = 200,000
Purchase Price (New) 500,000
Additional Cost to prepare Asset 60,000
Additional Working Capital 5,000
Tax: If Gain
Total 565,000
Trade-in Allowance -200,000
Tax: If Loss -15,000 [50,000 x 30%]
Avoidablr Costs 0
Net Investment 350,000
NET CASH RETURN
Income:
Cash flow from operation before tax 40,000
Less:
Other cash operating costs 0
Depreciation Expense -20,000
Proceeds before taxes 20,000
Less:
Income tax -6,000 [20k x 30%]
Net Income 14,000
Add:
Depreciation Expense 20,000
Annual Cash Flow after Taxes 34,000
MINIMUM RATE OF RETURN
A. Cost of Debt C. Ordinary Shares
6% (1 - 32%) 2 / 40 + 4%
> 0.0408 or 4.08% > 0.09 or 9%
B. Preference Share
5 / 62.50
0.08 or 8%
A. NON - DISCOUNTED CASH FLOW [It does not recognize the time value of money.]
1. PAYBACK PERIOD
Proposal A:
Net Investment 150,000
Annual Cash Returns 75,000
Payback Period 2
Proposal B:
Net Investment 300,000
Year 1 to 3 Cash return -225,000
Total 75,000 [Ito na lang 'yung kulang bago maretun 'yung investment.]
Divided by Year 4 to 5 Cash Return 100,000
0.75
3
Payback Period 3.75
2. ACCOUNTING RATE OF RETURN
ARR on Initial Investment
Annual net income 10,000
Depreciation Expenses -3,250
Total 6,750
Initial Net Investment 65,000
Accounting Rate of Return 10.38%
Average Annual Profit
Inflows, Year 1 to 2 40,000
Year 3 to 4 20,000
Year 5 30,000
Depreciation Expenses -75,000
Total Profit 15,000
Divided by 5
Average Annual Profit 3,000
3. BAIL-OUT PAYBACK PERIOD
Year Annual Cash Return Salvage Value Total Cumulative Cash Inflow
1 50,000 70,000 120,000 (50k + 70k)
2 50,000 55,000 155,000 (50k + 50k + 55k)
3 50,000 40,000
4 50,000 25,000
5 50,000 10,000
What is the Bail-out Payback Period?
1 Year + (150,000 - 105,000) / 50,000 = 11.09 Year
Annual savings 52,000
Weighted Average cost of capital
Source Amount Proportion Cost of Capital
Bank loan 300 30% 4.08%
Preference loan 100 10% 8%
Ordinary loan 200 20% 9%
Retained Earnings 400 40% 9%
Total 1000 100%
SCREENING CAPITAL INVESTMENT PROPOSALS
Year Cash Flow
1 70k
2 60k
3 55k
4 40k
5 30k
6 25k
'yung investment.] 3 Years + (15,000 / 40,000)
3 Years + 0.375
Payback Period = 3.375 Years
ARR on Average Investment
Annual Net Income
Annual Expenses
Annual Depreciation
Total
ARR on Average Investment Initial Net Investment
Annual net income 10,000 Salvage Value
Depreciation Expense -3,250 Divided by
Total 6,750 Accounting Rate of Return
Divided by: Initial Net Investment 65,000
Salvage value 0
Divided by: 2
Accounting Rate of Return 20.80%
ARR on Average Investment
Annual Net Income 3,000
Divided by Net Initial Investment 62,500 [100k + 25k / 2]
ARR on Average Investment 4.80% [ (Initial Investment + Salvage value) / 2]
Bail out Payback Period
Not yet
Yes [Sobra pa nga 5k]
Weighted Cost
1.20%
0.80%
1.80%
3.60%
7.40%
Cummulative
70k
130k
185k
225k
255k
280k
Note:
Since ang investment ay 200k, makukuha na siya sa Year 3 but kulang pa
ng 15k. So, yung 15k na yon kukunin sa Year 4 kaya dinivide sa 40k.
Average Annual Profit
200,000 Inflows, Years 1 to 12 2,400,000
-50,000 Less: Annual Expenses -600,000
-35,000 Less: Depreciation -420,000
115,000 Total Profit 1,380,000
420,000 Divided by 12
0 Average Annual Profit 115000
2
54.76%
