1. Net cost of investment.

The Hill Top Company plans to open a new branch office wherein the
company shall invest P900,000 in furnishings and equipment. Construction costs, lease deposits,
and other initialization outlays are estimated at P1,200,000. Sales from this new branch are
estimated at P9,000,000 a year. One-fourth of these sales will be in the form of accounts
receivable at any given time. Cost of goods sold are estimated to be 75% of sales. The investment
in merchandise inventory will amount to approximately P800,000 at any given time during the
year. Cash of P220,000 will be needed to meet payments for operating expenses. Accounts
payable and other current liabilities will increase
Furnishings and equipment
by P650,000.
Construction and other outlays
Cash
Required: Compute the total amount to be
A/R
invested in the new branch for Inventory
decision-making purposes. CLiab

e
Net cost of investment

c
er ia ur o
s
se red re

m
u r ha y
v
Co s s stud

co
o.
is
Th

H
a
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 2. Net returns. The Cebu Corporation is planning
to add a new product line to its present
business. The new product will require a new Indirect Direct
equipment costing P2,500,000, having a five- Sales 28,000 28,000
year useful life with no residual value. The - Mat (10,000) (10,000)
following estimates are made available: - DL
Annual sales P 28,000,000 - FOH
Annual costs and expenses: - MDE
Materials 10,000,000 - D/Expense n.a.
Labor 5,000,000 PBT / CFBT
Factory overhead (excluding - Tax
depreciation on new equipment) PAT
8,000,000 + D/Exp n.a.
Marketing and distribution ACI
expenses 1,000,000
Income tax rate, 40%.

ce
Required:

er ia ur
a. Annual income after tax.
b. Annual net cash flow after tax.

s o
se red re

m
u r ha y
v
Co s s stud

co
o.
is
Th

H
a
w

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 3. Payback period, unequal cash flows. An investment of P3,500,000, can bring in the
following annual cash income,
net of tax:
First year P 900,000 n Annual Cash to Payback
Second year 800,000 Cash date Years
Third year 650,000 Income
Fourth year 1,400,000 1 900 900 1
Fifth year 750,000 2 800 1,700 1
Sixth year 70,000 3 650 2,350 1
4 1,400 3,500 ?

Required: Determine the PP, PR, SARR, and AARR.

4. Payback bailout method. An equipment costing P2,400,000 is expected to yield the

following net cash inflows and residual values:

e
Year Net cash inflow Residual value, net of tax

c
1 P 800,000 P 400,000

er ia ur
2 800,000 100,000
3 600,000 50,000
4 300,000 20,000
s
Required: Determine the payback bailout period.
o
se red re
n Annual Cash Res Total Payback

m
Cash to date Value Cash Bailout
u r ha y
v
Income Years
Co s s stud

1
2
3
800
800
600
800
1,600
2,200
co 400
100
50
1,200
1,700
2,250
1
1
1
o.
4 300 2,500 20 2,400 ?
is

5. Accounting rate of return. The Clean Company is considering the production of a new product line
Th

which will require an investment of P1,000,000,, no scrap

CFBT 200,000
value. The investment will have a useful life of ten years,
- DExp 100,000
during which annual net cash inflows before taxes of
PBT 100,000
a

P200,000 are expected. The income tax rate is 40%.

- Tax 40,000
Required:
w

PAT 60,000
1. Annual net income for purposes of computing the
accounting rate of return. SARR 6%
2. Accounting rate of return based on original and average ARR (Ave) 12%
investment.

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 6. Net present value, uneven even
cash inflows. An equipment costing a. NPV = ?
P900,000, with a residual value of n ACI PVF@10% PVCI
P30,000 at its useful life of five 1 610,000 0.909
years, is expected to bring the
2 460,000 0.826
following net cash inflows:
First year P 610,000 3 280,000 0.751
Second year 460,000 4 100,000 0.683
Third year 280,000 5 70,000 0.621

e
Fourth year 100,000 RV5 30,000 0.621

c
Fifth year 70,000 WC5 260,000 0.621

er ia ur
Working capital of P110,000 is - PV of outflows:
expected to be infused at the initial
year of the equipment. At the end
of the second year, the working
s o COI
WC0
900,000
110,000
WC2 150,000 0.826
se red re
capital shall be increased by Mrep3 120,000 0.751
P150,000 Also, the equipment is Total PVCO
expected to undergo a major repair

m
Net present value
u r ha y

to increase its productivity and

v
Co s s stud

efficiency by the end of the third b. PI = PVCI/PVCO

year that will cost the company
P120,000. The company uses a 10%
co c. NPVI = NPV/PVCO
discount rate.
o.
is
Th

H
a
w

Southern Mindanao Academic Review 2nd Floor Lourdes Bldg., Lapulapu St. Agdao, Davao City
6F J&TDavao
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City • Cebu CityBlvd., Sta.•Mesa,
• Manila Dubai, UAE and
Manila Academic
 (082)Review
3041374| and Training School,
www.reviewer-online.com
2nd Floor
 (02) Training
Lourdes Services
Bldg., Lapulapu
3921853| St. Agdao, Davao City
www.mirsreview.com
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 Required: Compute the following in relation to the proposed investment:
a. Net present value.
b. Profitability index.
c. Net present value index.

7. Capital rationing. Blue and Green Company has available P50 million for capital investments.
The company is considering the
following business projects: RankProject COI COI To Date
Profitability
Proposal Cost Index
A P10 M 1.26
B 28 M 1.89
C 20 M 1.75
D 25 M 1.14
E 30 M 1.93

e
The company uses a 12% discount rate. In what project proposals should the company invest

c
its money?

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8. Discounted payback period, even and uneven cash inflows. Globe Corporation is

Cost of investment
Project X
P5,000,000
s o
considering to invest in the following project opportunities:
Project Y
P5,000,000
se red re
Net cash savings, after tax:
Year 1 2,200,000 3,500,000

m
Year 2 2,200,000 2,500,000
u r ha y

Year 3 2,200,000 1,500,000

v
Co s s stud

Year 4 2,200,000 500,000

Required: Discounted payback period
for each proposed project using a 16%
co n PVF
@16%
Disc. Cash Inflows To Date
Proj X Proj Y
o.
discount rate. 1 0.862
2 0.743
is

3 0.641
4 0.552
Th

Disc. PP
a
w

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