The document discusses a capital budgeting problem for Arleen Corporation considering purchasing a new machine for $400,000 that will be depreciated over 5 years. It provides the company's desired rate of return of 10% and present value factors. It also provides the income from operations and net cash flows for each of the 5 years. To determine if the project has a positive or negative net present value, the annual net cash flows must be discounted using the present value factors and compared to the $400,000 investment amount. The summary calculates the net present value is positive $55,200, so the answer is B.
The document discusses a capital budgeting problem for Arleen Corporation considering purchasing a new machine for $400,000 that will be depreciated over 5 years. It provides the company's desired rate of return of 10% and present value factors. It also provides the income from operations and net cash flows for each of the 5 years. To determine if the project has a positive or negative net present value, the annual net cash flows must be discounted using the present value factors and compared to the $400,000 investment amount. The summary calculates the net present value is positive $55,200, so the answer is B.
The document discusses a capital budgeting problem for Arleen Corporation considering purchasing a new machine for $400,000 that will be depreciated over 5 years. It provides the company's desired rate of return of 10% and present value factors. It also provides the income from operations and net cash flows for each of the 5 years. To determine if the project has a positive or negative net present value, the annual net cash flows must be discounted using the present value factors and compared to the $400,000 investment amount. The summary calculates the net present value is positive $55,200, so the answer is B.
The document discusses a capital budgeting problem for Arleen Corporation considering purchasing a new machine for $400,000 that will be depreciated over 5 years. It provides the company's desired rate of return of 10% and present value factors. It also provides the income from operations and net cash flows for each of the 5 years. To determine if the project has a positive or negative net present value, the annual net cash flows must be discounted using the present value factors and compared to the $400,000 investment amount. The summary calculates the net present value is positive $55,200, so the answer is B.
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CAPITAL BUDGETING
1. The management of Arleen Corporation is considering the purchase of a new
machine costing P400,000. It will be depreciated using straight line method for 5 years. The companys desired rate of return is 10%. The present value of P1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively, and the present value of annuity of 1 for 5 periods at 10 percent is 3.79. In addition to the foregoing information, use the following data in determining the acceptability in this situation: Year 1 2 3 4 5
Income from Operations
P120,000 80,000 70,000 30,000 150,000
Net Cash Flow
P180,000 120,000 100,000 90,000 90,000
Compute the net present value.
A. Negative P 126800 B. Positive P 55,200
C. D.
Negative P 99,600 Positive P 36,400
Answer and Solution:
Cash Flow 180,000 120,000 100,000 90,000 90,000 Total Amount of investment Net Present Value
PV Factor 0.909 0.826 0.751 0.683 0.621
PV of annual net cash
flows: 163,620 99,120 75,100 61,470 55,890 455,200 400,000 B. 55,200
2. . Baho Co. is considering the sale of a machine with the following characteristics. Book value
P120,000
Remaining useful life
5 years
Annual straight-line depreciation
P24,000
Current market value
P 70,000
If the company sells the machine its cash operating expenses will increase by P30,000 per year due to an operating lease. The tax rate is 40%. Calculate the increase in annual net cash outflows as a result of selling the machine. A. 34,000
B. 43,000
C. 33,600
D. 27,600
Answer: D) increase in annual cash outflows: $27,600 ($30,000 pretax cost increase - $2,400 decrease in income taxes; the $30,000 increase in cash costs is partially offset by losing a $24,000 depreciation deduction)
3. The Stop Cheating Corporation is planning to invest in a four-year project that will cost P750,000. Stop Cheatings cost of capital is 8% while the market rate at that date was 9%. Additional information on the project is as follows: Year 1 2 3 4
Cash Flow from Operations
P200,000 P220,000 P240,000 P260,000
Present value of P1 at 8% at 9% 0.926 0.917 0.857 0.842 0.794 0.772 0.735 0.708
Should Stop Cheating accept or reject the project and what will be the advantage or disadvantage of Powerful in continuing the project? a) Accept, P5,400 advantage b) Accept, P12,000 advantage c) Reject, P5,400 disadvantage
d) Reject, P12,000 disadvantage
Answer: A) Accept, P5,400 advantage Solution: Present value of cash inflow after taxes at 8%: Year Amount PV Factor 1 200,000 x 0.926 2 220,000 x 0.857 3 240,000 x 0.794 4 260,000 x 0.735 Total Less: Net Investment Net Present Value/ Advantage 4. Given:
= = = =
Project's investment= P400,000
Present value of after tax CFs=P500,000 Outstanding shares= P100,000 Price=P40
Q: What is the project's effect on the stock price?
A. Increase by P2. B. Decrease by P2. C. Increase by P1. D. Decrease by P1.
Asnwer:
C. Increase by P1 NPV= P100k (500k-400k) MV(b4 project) = P4M (100k x 40) MV(after project) =P4.1M (4M+100k) Price after project =P41 (4.1M/100k)
RELEVANT COSTING 5. Dont Copy Enterprises, Inc. has an annual plant capacity to produce 2,500 units. Its predicted operations for the year are: Sales revenue (2,000 units at P40 each) Manufacturing Costs: Variable Fixed Selling and Administrative Costs: Variable (commissions on sales) Fixed
P80,000 P24 per unit P17,000 P2.50 per unit P2,500
Should Dont Copy accept a special order for 400 units at a selling price of P32 each, which is subject to half the usual commission rate per unit? Assume no regular sales at regular prices. a. b. c. d.
No. The company will lose P920.
Yes. The company will have incremental profits of P2700. Either way. No. The company will lose P1200.
Answer & Solution:
The special order should be accepted. Incremental revenue from special order (400 x P32) Less: Incremental costs Manufacturing (400 x P24) Sales commission (400 x P1.25) Total Incremental profit
12,800 9,600 500 10,100 2,700
6. Bae Curry sells product Duck at a price of P21 per unit. Bae's cost per unit based on the full capacity of 200,000 units is as follows: Direct Materials Direct Labor Overhead (2/3 of which is fixed)
P4 5 6
A special order offering to buy 20,000 units was received from a foreign distributor. The only selling costs that would be incurred on this order would be P3 per unit for shipping. Bae has sufficient existing capacity to manufacture the
additional units. To achieve an increase in operating income of P40,000, Bae
should charge a selling price of: A. 14
B. 16
C. 15
D.18
Answer and Solution:
DM 4 DL 5 VOH 2 Selling 3 Total cost 14 Multiply by: Offer in units 20,000 Total cost 280,000 Operating Income 40,000 Total cost 320,000 Divide by: Offer in units 20,000 Price B. 16 7. Rey Company has two sales territories-South and North. Financial Information for the two territories are:
Sales Direct costs Variable Fixed Allocated Common Costs Net Income(Loss)
South P 980,000 (343,000) (450,000) (275,000) P(88,000)
North P750,000 (225,000) (325,000) (175,000) P25,000
Because the company is in a start-up stage, corporate management feels that
the South territory is creating too much of a cash drain on the company and it should be eliminated. If the South territory is discontinued, one sales manager (whose salary is P40,000 per year) will be relocated to the North territory. By how much would Rey's income change if South territory will be eliminated? A. B. C. D.
increase by P 88,000 increase by P 48,000 decrease by P267,000 decrease by P227,000
Answer: D. Decrease by P227,000
Sales forgone
P(980,000)
Variable cost avoided
343,000
Fixed cost avoided
410,000
Decrease in income
P227,000
8. Lucian Inc. estimates that 60,000 components will be used in manufacturing a
specialty steel window for the next year. Its supplier quoted a price of P60 per component. Lucian prefers to purchase 5,000 units per month, but its supplier could not guarantee this delivery schedule. In order to ensure availability of these components, Lucian is considering the purchase of all the 60,000 units at the beginning of the year. Assuming Lucian can invest cash at 8%, the company's opportunity cost of purchasing all the 60,000 units at the beginning of the year is
A. P150000
B. P132000
Answer: B. P132,000
Inventory at beginning if all purchased at the beginning (60,000 x 60) Inventory purchase monthly (5000 x 60) Excess inventory Multiply: Average Factor Average Excess inventory Rate of possible earnings Income lost
