Acme is considering the sale of a machine with a book value of $80,000 and 3 years remaining in its

useful life. Straight-line depreciation of $25,000 annually is available. The machine has a current market
value of $100,000. What is the cash flow from selling the machine if the tax rate 40%. a. $25,000 b.
$80,000 c. $92,000 d. $100,000 2 Hatchet Company is considering replacing a machine with a book value
of $400,000, a remaining useful life of 5 years, and annual straight-line depreciation of $80,000. The
existing machine has a current market value of $400,000. The replacement machine would cost
$550,000, have a 5-year life, and save $75,000 per year in cash operating costs. If the replacement
machine would be depreciated using the straight-line method and the tax rate is 40%, what would be
the net investment required to replace the existing machine? a. $90,000. b. $150,000 c. $330,000 d.
$550,000 3. Diliman Republic Publishers, Inc. is considering replacing an old press that cost P800,000 six
years ago with a new one that would cost P2,250,000. Shipping and installation would cost an additional
P200,000. The old press has a book value of P150,000 and could be sold currently for P50,000. The
increased production of the new press would increase inventories by P40,000, accounts receivable by
P160,000 and accounts payable by P140,000. Diliman Republic’s net initial investment for analyzing the
acquisition of the new press assuming a 35% income tax rate would be a. P2,450,000 b. P2,425,000 c.
P2,600,000 d. P2,250,000 4. Key Corp. plans to replace a production machine that was acquired several
years ago. Acquisition cost is P450,000 with salvage value of P50,000. The machine being considered is
worth P800,000 and the supplier is willing to accept the old machine at a trade-in value of P60,000.
Should the company decide not to acquire the new machine, it needs to repair the old one at a cost of
P200,000. Tax-wise, the trade-in transaction will not have any implication but the cost to repair is tax-
deductible. The effective corporate tax rate is 35% of net income subject to tax. For purposes of capital
budgeting, the net investment in the new machine is a. P540,000 b. P610,000 c. P660,000 d. P800,000 5.
Great Value 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 a. P50,200 b. P52,600 c.
P53,600 d. P57,600 6. Hooker Oak Furniture Company is considering the purchase of wood cutting
equipment. Data on the equipment are as follows: Original investment $30,000 Net annual cash inflow
$12,000 Expected economic life in years 5 Salvage value at the end of five years $3,000 The company
uses the straight-line method of depreciation with no mid-year convention. What is the accounting rate
of return on original investment rounded off to the nearest percent, assuming no taxes are paid? a.
40.0% b. 20.0% c. 24.0% d. 22.0% MSQ-08 Page 6 7. A 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 a. P7,120 b. P10,000 c. P16,392 d. P23,022 8. Lor Industries is analyzing a capital
investment proposal for new machinery to produce a new product over the next ten years. At the end of
the ten years, the machinery must be disposed of with a zero net book value but with a scrap salvage
value of P20,000. It will require some P30,000 to remove the machinery. The applicable tax rate is 35%.
The appropriate “end-of-life” cash flow based on the foregoing information is a. Inflow of P30,000. c.
Outflow of P10,000. b. Outflow of P6,500. d. Outflow of P17,000. 9. C Corp. faces a marginal tax rate of
35 percent. One project that is currently under evaluation has a cash flow in the fourth year of its life
that has a present value of $10,000 (after-tax). C Corp. assumes that all cash flows occur at the end of
the year and the company uses 11 percent as its discount rate. What is the pre-tax amount of the cash
flow in year 4? (Round to the nearest dollar.) a. $15,181 b. $23,356 c. $9,868 d. $43,375