Ae23 Capital Budgeting 2

AE 23- STRATEGIC COST AND MANAGEMENT
CAPITAL BUDGETING
1) A new system will require an increase in working capital of P50,000, but It is expected to generate additional
sales of P100,000 per year. If the gross profit rate is 40% and incremental fixed costs is P20,000, the payback period
in years (ignore income taxes) is ________.
2) Daisy Corporation is planning to acquire a new machine that will have an estimated payback period of five years.
It will be depreciated on s straight line basis at P10,000 per year. It is expected to produce cash flows from operations,
net of income taxes at P20,000 per year in each of the first 2 years of the payback period and P12,000 in each of the
last 3 years of the payback period. The corporation is subject to 32% tax rate.
How much will the new machine cost?
3)ABC Corporation is planning to invest in a 3-year project that is expected to yield cash flows from operaions,
net of income taxes, as follows:
1st year- P60,000 2nd year- P96,000 3rd year- P115,000
The company requires an internal rate of return of 12%. The maximum amount that the corporation should invest
is _______.
4) Kristal Company is planning to buy an equipment that would cost P180,000 and yield an estimated net
cash inflows of P36,000 for 10 years, after income taxes. This investment project is expected to earn a discounted
rate of return of at least 12%. In order to determine the net present value of buying the new equipment, the
company should first multiply the P36,000 by which of the following factors?
a) 3.106 b) 0.322 c) 5.650 d) 12
5)Angel Foundation, Inc., a tax-exempt coporation, is planning to invest P280,000 in a project at the beginning of 2022.
The estimated annual cash savings from this project is P90,000. The project will be depreciated over its 5 year life
on the straight line basis. The foundation's desired rate of return on investments of this type is 10%.
a) The investment project's net present value is _______
b) The investment project's payback period is ______
c) For the project's first year, the accounting rate of return on its average book value for 2022 would be _____
14d) Angel Foundation's internal rate of return on this investment project is
a) less than 10% b) more than 16% c) 10% d) less than 16%
6)Mama Corp. is evaluating two investment opportunities. Data about the two projects are as follows:
Project 1 Project 2
Cost of investment P48,00 P1,600,000
Cash inflow,end of Year
1 P64,000 P1,120,000
2 P64,000 P800,000
The two investment projects are considered to be equally risky.

a) If the cost of capital is zero, what is the net present value of Project 1?
b) If the cost of capital is zero, what is the net present value of Project 2?
c) If the cost of capital is 10% , the profitability index of Project 1 is ____.
d) If the cost of capital is 10% , the profitability index of Project 2 is ____.
7) Abby Company, engaged in selling bottled water, is evaluating two possible investments:
1) Delivery truck- Acquisition cost, P570,000; useful life- 6 years.
The truck can deliver an additional 150,000 bottles of water per year. The contribution margin
per bottle is P2. The acquisition of the new truck will cause an increase in fixed operating costs,
excluding depreciation, of P5 per kilometer. The truck is expected to run at 20,000 kms per year.
2) Bottling machine- acquisition cost, P450,000; useful life- 6 years.
The use of the new bottling machine would enable the company to save labor time by 20 hours
per day. The labor rate per hour is P40 and there are 280 operating days in a year.
For capital investment projects, the company's minimum desired ROR is 10%. The company pays
income tax at 32% of income before tax.
a) What is the payback period of each project?
b) What is the net present value of each project?
c) What is the profitability index of each project?
8)Charity Corp. is evaluating a proposal to acquire a new equipment. The equipment would require
an investment of P417,860, including freight and installation costs. It is expected to have a 10-year life with no
salvage value. It has been estimated that the new equipment would increase the company's cash inflows, net of
expenses and income taxes, byP68,000. The company is subject to 32% income tax. Its cost of capital is 8%.
If the IRR method is to be used in making a decision whether to buy the equipment or not, the company should:
a) buy the equipment because the IRR is greater than the cost of capital
b) buy the equipment because the cost of capital is greater than the IRR
c) not buy the equipment because its IRR is greater than its cost of capital
) not buy the equipment because the IRR is less than the time-adjusted rate of return

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AE 23- STRATEGIC COST AND MANAGEMENT

The two investment projects are considered to be equally risky.

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