Muitiple cho

Questions

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Name:

Schedule:
Professor's Name:
Date:

1 The following costs should be included in a capital budget, except:

a. Additional income taxes that would be paid if the project is implemented

b Interest paid on a loan taken out specifically for the project

C. Rent income given up because a project required the use of an unusedwarehouse

d. Cost savings realized by the project

Source: Author

|2. Which of the following items is not an example of a capital expenditure?

a. Aventilation system upgrade for DENR compliance

Additional safety stock necessitated by a company's opening of a new branch

b
C Project bonuses paid to employees

d. Purchase of a new assembly machine that will cut labor and maintenancecosts

e. Purchase of a new computer server for the research and development group

Source: AICPA,adapted

3 Which of the following terms refers to a performance measurement that is calculated

income minus the product of its total
as an investment center's after-tax operating

average cost of capital (WACC)?

assets multiplied by the company's weighted

d. Net present value

Economic value added
e. Profitability index
b. Residual income

C Return on investment
Source: AICPA,adapted

items is included in the payback period

4
capital budgeting, which of the following
In

model calculation?

initial outlay
a. of the project's
The total amount
flows of the project
future cash
b. The futurevalue of the
salvage value
project's estimated
C. The present value of the
over the life of the project
The amountof depreciation
d.
e. cost of capital adapted
The company's Source: AICPA,

Budgeting 215
CHAPTER 5 Capital
 of the following situations
which will the
In rankings two

of
method? determined using the internal mutually excusive
of the payback rate of return (|RR)
investments
Which of the following is not ashortcoming value (NPV) method have the method and the net
highest likelihood
present to be
different?
It ignores the time value of money. .esbe expected
the expiration of the payback
lives of the two projects are equal
beyond
b It offers no consideration of cash flows a.
required investments are equal
and the amounts of the

period.
looking at expected returne Ehoth projects have the same lives but required
risks without
C. It focuses too much on potential investments are unequal
E the required rate of return equals the IRR of each project
d It offers no indication of a project's liquidity. C.

period. Ifthe required rate of return is the IRR of each project

establishing a short payback d. higher than
It encourages
Source: CMA,adapted fthe twO projects have
e. unequal lives and the size of the investment for each

of project is different
6 Which of the following is a valid method of calculating the internal rate of return

uneven cash flows? Source: AICPA, adapted

year and subtract it fronm company

the present value of each cash flow for each A estimates that its pre-tax cash inflows in real terms is expected to reach
Calculate
the cost of the investment. e20 million within two years. If inflation is expected to be 6% per year during that

b or four combinations of net present value (NPV)and discount rate on period, what is the pre-tax cash inflows expressed in nominal terms?
Plot three
at
a graph, connect the points with a smooth line, and locate the discount rate
d.
P17,799,929 22,400,000
which NPV=0.
b. P17,857,143 e. P22,472,000
C. Divide the total investment by the average cash flows.

d. C. P20,000,000
Calculate the project net income for each year, and then compute a simple I

average. Average the project's beginning and ending book value. Divide the Source: AICPA, adapted

average net income by the average book value.

The following information applies to the next three (3) questions.
Compute the total of the present values of each year's cash flow. Divide the

I
Elektro Plating, Inc. is considering the purchase of a new 60-ton stamping press. The
total of the present values by the initial investment.

Source: AICPA, adapted

| press costs P3.24 million, and an additional P360,000is needed to install it. The press
straight-line to zero over a five-year life. The press will generate no
I will be depreciated
7 Apositive net present value (NPV) in a capital budgeting project indicates additional revenues, but it will reduce cash operating expenses by P1.26 million annually.
that:
The press will be sold for 1.08 million after five years. An inventory investment of
the project's payback period at most 75% of the project
is life. and Elektro Plating, Inc. is in the
P540,000 is required during the life of the investment,
b. the present value of cash inflows divided by the 25%
than 100%.
initial cash outlay would be lessI tax bracket.

Source: CFA, adapted

the present value (PV) of cash outflows
C
the rate of return for the
project is
exceeds

greater than
the PV of

the discount
cash inflows.

percentage rate
I 10. What is the lektro Plating, Inc.s net investment outlay?

used in the NPV

computation. a. P3,915,000
P3,240,000
the project's internal rate
of return (IRR) is equal e. P4,140,000
rate used in the NPV
to the discount percentage
b
P3,600,000
computation.
C.
P3,780,000
to:
is closest
Source: CMA, adapted 11. after-tax
operating cash
flow
Elektro Plating, Inc.'s incremental annual

a. P1,305,000

d
P945,000
e. P1,350,000
b.
P1,125,000
C

216 FINANCIALMANAGEMENT P1,260,000

217
CHAPTER 5 Capital Budgeting
 the
company provides following
flow at the end A
of Year 5? information about discount
cash 15. factors and
non-operating flows: yearly
12.. What is the terminal year after-tax cash
d. P1,350,000
Year Discount Factor
P810,000 Annual Cash Flow
P1,620,000 1 0.9
b. P1,080,000 200,000

C. P1,215,000 400,000
0.7
machine to P500,00o
of a new state-of-the-art replace
13. Hobbes is considering the purchase
company's effective tax rate is 20% and its cost
S00,000
machiñe. The
its hand-operated below:
regarding the existing and new machines are presented
capital is 12%. Data uses the discounted
If the company payback method, an outlay of P1 million in cash
Machine New Machine
Existing

P4,500,000
would most likely result in payback during which of the following months?
2.500,000
Original cost
P200,000 a Before Month 30 d. Between Month 42 to 47
nstallation bosts
P300,000
Between Month 31 to 35 e. Month 48
Freight and insurance b After

Epected end salvage valu C. Between Month 36to 41

Straight line Straight line.
Depreciation method
ears 5 years Source: AICPA, adapted

16. An analyst at Villaflor Enterprises estimates that a project has the following after-tax
The existing machine has been in service for seven years and could be sold currenty for
net cash flows (in thousands)and estimates the discount factor usinga cost of capital
P1,250,000. If the new machine is purchased, Hobbes expects to realize a P1,500,000
before-tax annual reduction in labor costs. If the new machine is purchased, what is of 12%.
the net initial cash outflow at Year 0for net present value calculation purposes?
Year 1 2 4.

b. Cash flows -500 150 200 150 125 75 50

P3,250,000 P4,000,000
0.8929 0.7972 0.7118 0.6355 0.5674 0A523
C. Discount factor 1.0000
P3,750,000 P5,000,000
f.
P3,850,000 The discounted payback period
d
project's is closest to:

Source: CMA, adapted 3.00 years 4.26 years

14. A new venture will require a fixed asset investment of P20,000 and a working capital b. 4.48 years
3.26 years

e
investment of P10,000. The fixed assets have no salvage value at the end of the
C. 4.10 years
project's four-year life, and the working capital will be completely recovered at the
end of the project. Source: CMA, adapted
The cost of capital is 16%. Assume that using this time value of
money, the present value of an ordinary annuity of P1/year for four years is 2.8, and All of the projects are
four projects as possible investments.
the present value of P1 at the end of four 7. A company is evaluating
years is 0.6. What is the annualnet cash select only one project. The company's
inflow required for the project to break even on a Tor the same activity, and the company will

time-adjusted basis?
is 10%, and the tax rate is 40%. The company's
discount rate for such projects
a. P7,143 as follows:
information about the projects is
d. P12,857 reinvestment rate is 10%. Additional

P8,571
b
P18,000 Internal rate of return Net present value
Project
C. P10,714 11.0% P 210.000
A
12.0% P195,000

Source: AICPA, adapted 13.0% P175,000

200,000
14.0%

15.0%
P 180,000
E

218 FINANCIAL MANAGEMENT

219
CHAPTER 5 Capital Budgeting
 will be depreciated over 5 years
The machine on a
to the company? taxable income from straight-line
basisfor tax
nat project wouldbemost advantageous has significant
other lines of
business, uses a
purposes.
Solar 40%
to a effective income tax
and|issubject
d. Project D rate. discount rate of
a. Project A 20%,
Project E
b. Project B Source: CMA, adapted
C. value the project would be:
C

of
Project The net present
Source: 20.
AICPA,adapted
d.
-P115,780 P76,330
evaluations capital projects using a variety of performane
18. Hordak Corporation
P16,530 e.
16% a maximum payback period of3 yeare b. P161,550
screens, including a hurdle rate of and

its review of a project based on the following projections. C. P42,640

Management is completing

Capital investment P 20,000,000 The project's internal rate of return is closest to:
21.

Annual cash flows P 7400,000

11% 21%
Straight-line depreciation 5years
16% e. 25%
Terminal value P2,000,000
C. 19%
The projected internal rate of return (IRR) is 20%.Which of the following alternatives

reflects the appropriate conclusions for the indicated evaluative measures? 22. The project's accounting rate of return amounts to:

a. C. d.
IRR: reject Payback: accept IRR: accept Payback: accept a. 25.6% 42.3%

b. IRR:reject Payback: reject IRR: reject Payback: reject e 46.4%

32.0%
Source: CMA C. 38.4%
19. Acompany invests P15 million in property for which it has a contract to sell in one
[Link] is the prject's estimated payback period?
year for a profit of 20%. If the company financed the acquisition from a bank loan with
a guaranteed 10%, what the net present Less than 2 years Between 4 to 5 years
interest rate of is value of the company's a.
investment?
Between 2to 3years Never

e
b

P1,200,000 P2,045,455 C. Between 3 to 4 years

b. P1,363,636 e. P2,727,273

C. 24: What is the discounted payback period for the project?

P1,875,000
d. Between 4 to 5years
Author Less than 2 years

a.
Source:
The following Never
information applies to the next six (6) questions. b. Between 2to 3 years
Solar, Inc. is considering the purchase of a machine for P500,000 which will last 5
C. Between 3to 4 years
years. A financial analysis isbeing 30%, and 15% (on an after-tax
can be sold for 70%.50%,
developed using the following information:
ASSUme that the machine and Year 4, respectively.
Year 2 1, Year 2, Year 3,
Year 3 value at the end of Year
1

Unit Sales
Year Year 4 Year 5 Dasis) of its initial
10,000 10,000 20,000 20,000 What is the payback bailout for the project?
20,000

Between 4 to 5
years
Selling price per unit 100 100 a.
d
100 P100 100 Less than 2years
Variable cost per unit 6 Never
e
b
Fixed costs
300,000 300,000
65 65 Between 2 to 3 years
300,000 300,000 300,000
Discount factor
C.
Between 3to 4 years
0.833 0.694 0.579
0.482 0.402

221
220 FINANCIALMANAGEMENT
Capital Budgeting
5
CHAPTER