Jake A.

Zulueta Assignments 8 on Capital Budgeting

ACC535M Tue: 6:00-9:00 PM

I. Theories and Concepts

1 A
2 B
3 E
4 A
5 C
6 B
7 C
8 B
9 C
10 D
11 A
12 B
II. Application of Concepts (With Solutions)

13 C $75000 / $20000 = 3.75 years

Less: Less: Operating

14 E Cash Revenue Cash Expenses Depreciation Income
Year 1 $ 8,000.00 $ (8,000.00) $ (4,000.00) $ (4,000.00)
Year 2 $ 12,000.00 $ (8,000.00) $ (4,000.00) $ -
Year 3 $ 15,000.00 $ (9,000.00) $ (4,000.00) $ 2,000.00
Year 4 $ 20,000.00 $ (10,000.00) $ (4,000.00) $ 6,000.00
Year 5 $ 20,000.00 $ (10,000.00) $ (4,000.00) $ 6,000.00
TOTAL INCOME $ 10,000.00

Average Annual Income = $10,000 / 5 years = $2000

Accounting Rate of Return = Average Annual Income / Investment

= $2000 / $20000
= .1 or 10%

15 D Less: Operating
Cash Revenue Cash Expenses and Depreciation Income
Year 1 $ 18,000.00 $ (8,000.00) $ 10,000.00
Year 2 $ 22,000.00 $ (10,000.00) $ 12,000.00
Year 3 $ 22,000.00 $ (9,000.00) $ 13,000.00
Year 4 $ 24,000.00 $ (9,000.00) $ 15,000.00
Year 5 $ 26,000.00 $ (9,000.00) $ 17,000.00
Year 6 $ 28,000.00 $ (12,000.00) $ 16,000.00
Year 7 $ 28,000.00 $ (11,000.00) $ 17,000.00
Year 8 $ 28,000.00 $ (12,000.00) $ 16,000.00
TOTAL INCOME $ 116,000.00

Average Annual Income = $116,000 / 8 years = $14500

16 A Accounting Rate of Return = Average Annual Income / Investment

= $14500 / $45,000
= .3222 or 32%

17 D Annual Depreciation = $200,000 / 10 years = $20,000

Average Annual Income = $25,000 - $20,000 = $5000
Accounting Rate of Return = $5,000 / $200,000
= 2.5%
18 A NPV = (Present Value Factor after 10 years x Annual Cash Inflow) - Initial Cost
= (8.111 x $25,000) - $200000
=$2,775

19 B NPV = (Present Value Factor after 10 years x Annual Cash Inflow) - Initial Cost
=($60,000 - $32,000) x 2.914 - $40,000
= $41,592

20 D Revenues $ 96,000.00
Less: Variable Cost $ (32,000.00)
Fixed out-of-pocket costs $ (20,000.00)
Annual Cash Inflow $ 44,000.00
Present Value of Annual Cash Inflow Factor 4.9676
The Present Value of Annual Cash Inflow $ 218,574.40

21 C =$200,000 x 4.8684 = $973,600

22 B =$80,000 x6.7100= $536,800

23 C
Year Cash Flow Discount Factor Present Value
0 $ (20,000.00) 1.000 $ (20,000.00)
1 $ 10,000.00 0.909 $ 9,090.00
2 $ 10,000.00 0.826 $ 8,260.00
3 $ 10,000.00 0.751 $ 7,510.00
NPV $ 4,860.00

24 E
Year Cash Flow Discount Factor Present Value
0 $ (20,000.00) 1.000 $ (20,000.00)
1 $ 5,000.00 0.909 $ 4,545.00
2 $ 10,000.00 0.826 $ 8,260.00
3 $ 15,000.00 0.751 $ 11,265.00
NPV $ 4,070.00

25 C
Year Cash Flow Discount Factor Present Value
0 $ (20,000.00) 1.000 $ (20,000.00)
1 $ 10,000.00 0.926 $ 9,260.00
2 $ 10,000.00 0.857 $ 8,570.00
3 $ 10,000.00 0.794 $ 7,940.00
NPV $ 5,770.00

26 C $1560 (1.00) = $12,000 x (discount rate)

Discount Factor = .130
Internal Rate of Return is = 12%

27 D $52,160 (1.00) = $10,000 x (discount rate)

Discount Factor = 5.216
Internal Rate of Return is = 14%

28 C $113,000 (1.00) = $20,000 x (discount rate)

Discount Factor = 5.65
Internal Rate of Return is = 12%

29 A $33,000-$3000 = $30000
B $30,000 / 4 years = $7,500
C $40,000 / 5000 = 8
D $20,000 / $2500 = 8
E $40,000 + $5,500 = $45,500
F $20000 -$1000 = $19,000
30 A $560,290 / $90,000 = 6.2 years
B ($90,000 - $56,000) / $560,290 = 0.06068 or 6.07%
C $90,000 x 6.145) - $560,290 = $-7,240
D $560,290/$90,000 = 6.225 corresponding to an IRR below 10%