CORDILLERA CAREER DEVELOPMENT COLLEGE

College of Business Education and Accountancy

Buyagan, Poblacion, La Trinidad, Benguet

Accounting 208B
Mgmt. Advisory Services

Problem 1: The Chief Financial Officer of Pauley Inc. has requested an evaluation of a proposed acquisition of a new
machine at a purchase price of P60,000, and with installation costs of P10,000. A P3,000 increase in working capital will
be required. The company has an old machine that has a book value of P5,000 and can be sold for P7,000. The new
machine will have a useful life of four years after which it can be sold for P10,000 after removal costs amounting to
P2,500. The estimated annual incremental operating revenues and cash operating expenses are P150,000 and P100,000,
respectively, for each of the four years. Pauley’s effective income tax rate is 40% and the cost of capital is 12%. Pauley’s
effective income tax rate is 40% and the cost of capital is 12%. Pauley uses straight-line depreciation for both financial
reporting and income tax purposes however, salvage value will not be considered for income tax purposes.

Required: Compute the initial investment costs, Annual after-tax cash inflow, and the cash flow at disposal period.

Problem 2: Tallispan Company has gathered the following data on a proposed investment project:
Cost of the investments 1,200,000
Annual cost inflows 240,000
Estimated salvage value 0
Life of the project 10 years
Discount rate 10%

Required: What is the NPV of this investment?

Problem 3: STA. ANA Corporation recently purchased a P900,000 asset that has three-year service life and no salvage
value. The expected pre-tax rate annual cash return is P500,000. The company is subject to a 30% income tax rate and
employs a 20% after tax hurdle rate of return in capital investment decisions. Management is studying whether to
depreciate the asset using the straight-line method or sum-of-the-year’s digit method.
PV factor of annuity of P1 at 20% 2.106
PV factor of a single payment at 20% - Year 1 0.833
- Year 2 0.694
- Year 3 0.579
Required:
1. How much is the NPV if the company uses the straight line method of depreciation?
2. How much is the NPV if the company uses the sum-of-years digit method of depreciation?

Problem 4: Vigan Corporation invested in a four year project. The company’s expected rate of return is 10%. Additional
information on the project is as follows:
After tax Cash Inflow from
Year Present Value of P1 at 10%
Operations
1 P40,000 .909
2 P44,000 .826
3 P48,000 .751
4 P52,000 .683

Required: Assuming a positive NPV of P10,000, determine the amount of the original investment.

Problem 5: Gapan Corporation acquired an asset at a cost of P46,000. It had an estimated useful life of ten years. Annual
after tax cash benefits are estimated at P10,000 at the end of each year. The following amounts appear in the interest table
for the PV of an annuity of 1 at year end for ten years:
16% - 4.83 18% - 4.49 20% - 4.19

Required: Determine the internal rate of return.

Problem 6: The following pertains to Bulacan Corporation’s investment plan

Pre-tax annual cash flow P80,000
Equipment P200,000
Useful Life 5 years
Salvage Value P50,000
Tax Rate 30%
Required: Compute the accounting rate of return of the investment
1. Based on Initial Investments
 2. Based on Average Investments

Problem 7: During October 2015, Adam Company had sales of P5,000,000, variable costs of P3,000,000 and fixed costs
amounting to P1,500,000 for product M. Assume that cost behavior and unit selling price unchanged during November,
2015. In order for Adam to realize operating income of P300,000 from Product M for November, sales would have to be
a. P3,750,000 b. P4,050,000 P4,500,000 d.P4,800,000

Problem 8: Wilson company prepared the following preliminary forecast concerning product G for 2015 assuming no
expenditure for advertising:
Selling price per unit P10.00 Variable Costs P600,000
Unit sales 100,000 Fixed costs P300,000

Based on a market study in December, 2014, Wilson estimated that it could increase the unit selling price by 15%
and increase the unit sales by 10% if P 100,000 were spent on advertising. Assuming that Wilson incorporates these
changes in its 2015 forecast, what should be the operating income from product G?
a. P175,000 b. P190,000 c.P205,000 d. P365,000

Problem 9: Singer, Inc. sells product R for P5 per unit. The fixed costs amount to P210,000 and the variable costs are
60% of the selling price. What would be the amount of sales if singer is to realize a profit of 10% of sales?
a. P700,000 b. P525,000 c. P472,500 d. P420,000

Problem 10: Lindsay Corporation reported the following results from sales of 5,000 units of product a for the month of
September ;
Sales P200,000 Fixed costs P60,000
Variable costs 120,000 Operating income 20,000

Assume that Lindsay increases the selling price of product A by 10% on October 1. How many units of product a
would have to be sold in October in order to generate an operating income of P20,000?
a. 4,000 b. 4,300 c. 4,500 d.5,000

Problem 11: Warfield Company is planning to sell 100,000 units of Product T for P 12 a unit. The fixed costs amounts to
P280,000. In order to realize a profit of P200,000, what would be the variable costs?
a. P480,000 b. P720,000 c. P900,000 d. P920,000

Problem 12: Thomas Company sells products X,Y, and Z, Thomas sells three units of x for each unit of Z, and two units of
Y for each until of x. The contribution margins are P1.00 per unit of X, P1.50 per unit of Y, and P3.00 per unit of Z. Fixed
costs are P 600,000. How many units of X would Thomas sell at the break-even point?
a. 40,000 b. 120,000 c. 360,000 d. 400,00

Problem 13: Anthony company has projected costs of goods sold of P4,000,000, including fixed costs of P800,000.
Variable costs are expected to be 75% of net sales. What will be the projected net sales.
a. P4,266,667 b.P4,800,000 d.P5,333,333 d.P6,400,000

Problem 14: Day Company is a medium-sized manufacturer of lamps . During 2015, a new line called “Twilight” was
made available to Day’s customers. The break-even point for sales of Twilight is P400,000 with a contribution margin of
40%. Assuming that the operating profit for the Twilight line for 2015 amounted to P200,000, total sales for 2015
amounted to:
a. P600,000 b. P840,000 c. P900,000 d. P950,000

Problem 15: The Insulation Corporation sells two products, Dee and Wee. Insulation sells these products at a rate of 2
units of Dee to 3 units of Wee. The contribution margin is P4 per unit for Dee and P2 per unit for Wee. Insulation’s fixed
costs are P420,000. What would be the total units sold at the break-even point?
a. 140,000 b. 150,000 c.168,000 d.180,000

Problem 16: The Shi company is planning to produce two products, Alt and Tude. Ship is planning to sell 100,000 units
of Alt at P4 a unit and 200,000 units of Tude at P3 a unit. Variable costs are 70% of sales for Alt and 80% of sales for
Tude. In order to realize a total profit of P160,000, total fixed costs would be
a. P80,000 b. P90,000 c. P420,000 d. P600,000

/dbay-an