PREPREV_SEMIFINAL

Capital budgeting techniques are least likely to be used in evaluating the

• Acquisition of new aircraft by a cargo company.

• Design and implementation of a major advertising program.

• Trade for a star quarterback by a football team

• Adoption of a new method of allocating non-traceable costs to product lines.

To approximate annual cash inflow, depreciation is

• Added back to net income because it is an inflow of cash.

• Subtracted from net income because it is an outflow of cash

• Subtracted from net income because it is an expense.

• Added back to net income because it is not an outflow of cash.

In capital budgeting decisions, the following items are considered among others:

1. Cash outflow for the investment.

2. Increase in working capital requirements.

3. Profit on sale of old asset

4. Loss on write-off of old asset.

For which of the above items would taxes be relevant?

• Items 1 and 3 only.

• Items 3 and 4 only.

• All items.

• Items 1, 3 and 4 only.

An advantage of the net present value method over the internal rate of return model in discounted cash flow analysis is that the net present value method

• Computes a desired rate of return for capital projects.

• Can be used when there is no constant rate of return required for each year of the project.

• Uses a discount rate that equates the discounted cash inflows with the outflows.

• Uses discounted cash flows whereas the internal rate of return model does not.

Which mutually exclusive project would you select, if both are priced at P1,000 and your discount rate is 15%; Project X with three annual cash flows of P1,000, or Project Y, with 3 years of zero cash flow followed by 3 years of P1,500 annually?

• Project X.

• Project Y.

• The IRRs are equal, hence you are indifferent.

• The NPVs are equal, hence you are indifferent.

Capital budgeting methods are often divided into two classifications: project screening and project ranking. Which one of the following is considered a ranking method rather than a screening method?

• Net present value.

• Time-adjusted rate of return.

• Profitability index.

• Accounting rate of return.

Amolo Inc. is considering the sale of a machine with a book value of P80,000 and 3 years remaining in its useful life. Straight-line depreciation of P25,000 annually is available. The machine has a current market value of P100,000. What is the cash flow from selling the machine if the tax rate 40%.

• P 25,000

• P 80,000

• P 92,000

• P 100,000

Rhans Company is planning to purchase a new machine costing P50,000 with freight and installation costs amounting to P1,500. The old unit is to be traded-in will be given a trade-in allowance of P7,500. Other assets that are to be retired as a result of the acquisition of the new machine can be salvaged and sold for P3,000. The loss on retirement of these other assets is P1,000 which will reduce income taxes of P400. If the new equipment is not purchased, repair of the old unit will have to be made at an estimated cost of P4,000. This cost can be avoided by purchasing the new equipment. Additional gross working capital of P12,000 will be needed to support operation planned with the new equipment.

The net investment assigned to the new machine for decision analysis is

• P 50,200

• P 52,600

• P 53,600

• P 56,700

Crystal company is considering putting up P50,000 in a three-year project. The company’s expected rate of return is 12%. The present value of P1.00 at 12% for one year is 0.893, for two years is 0.797, and for three years is 0.712. The cash flow, net of income taxes will be P18,000 (present value of P16,074) for the first year and P22,000 (present value of P17,534) for the second year. Assuming that the rate of return is exactly 12%, the cash flow, net of income taxes, for the third year would be

• P 7,120

• P 10,000

• P 16,392

• P 23,022

Roger, Inc. is planning to purchase a new machine that will take six years to recover the cost. The new machine is expected to produce cash flow from operations, net of income taxes, of P4,500 a year for the first three years of the payback period and P3,500 a year of the last three years of the payback period. Depreciation of P3,000 a year shall be charged to income of the six years of the payback period. How much shall the machine cost?

• P 12,000

• P 18,000

• P 24,000

• P 36,000