Page |1

Chapter 5 FINANCIAL STUDY (Part 2)

A. Unsophisticated Capital Investment Analysis

OPERATING CASH INFLOW

The basic calculation of operating cash inflow requires adding any noncash charges deducted as
expenses on the firm’s income statement back to the net profit after tax. The most common noncash charge
found on the income statement is depreciation. (Note: Depreciation will be added back to NIAT because it
does not involve actual outlay of cash.)
Operating Cash Inflow (OCI) = Net Income After Tax + Yearly Depreciation
Bluesea Lobster Operating Cash Inflow
Net Income Add: Operating
YEAR
after Tax (NIAT) Depreciation/year Cash Inflow (OCI)
2016 1,601,061.57 50,128.21 1,651,189.78
2017 2,126,434.10 50,128.21 2,176,562.31
2018 2,673,223.04 50,128.21 2,723,351.25
2019 3,262,409.15 50,128.21 3,312,537.36
2020 3,717,806.66 50,128.21 3,767,934.87
2021 4,198,572.16 50,128.21 4,248,700.37
2022 4,705,993.66 50,128.21 4,756,121.87
2023 5,240,071.16 50,128.21 5,290,199.37
2024 5,802,372.66 50,128.21 5,852,500.87
2025 6,389,818.17 50,128.21 6,439,946.38
39,717,762.33

A. Average Rate of Return- can be interpreted as the annual accounting rate of return expected on
the average investment.

The Assumptions:
1. Initial Investment or the Total Project Cost = P6,488,237.40
2. Lifespan or Economic life of the Project= 10 years

ARR= Average Net Income after Taxes (NIAT) = (Total NIAT/project econ life)
Average Investment = (Initial Investment/2)
 Page |2

Lobster Computed Average Rate of Return

YEAR NET PROFIT AFTER TAX (in Pesos)
1 1,601,061.57
2 2,126,434.10
3 2,673,223.04
4 3,262,409.15
5 3,717,806.66
6 4,198,572.16
7 4,705,993.66
8 5,240,071.16
9 5,802,372.66
10 6,389,818.17
TOTAL 39,717,762.33
Average NPAT 39,717,762.33/10 =3,971,776.23
DIVIDED BY: AVERAGE INVESTMENT P6,488,237.40 /2 = 3,244,118.70
ARR 122%

ARR= 39,717,762.33/10 = 3,971,776.23

6,488,237.40 /2 3,244,118.70
= 1.2243 x 100 = 122%
The Average Rate of Return (ARR) is the average profits after taxes divided by the firm’s initial
investment. The ARR shows more than a hundred percent (122%) which means that in every 1 peso of
average investment earns 122% net income after tax. Therefore: the project is acceptable.
B. Payback Period- is the exact amount is the exact amount of time required for the firm to recover
initial investment as calculated from cash inflows. In a mixed stream or nonuniform cash inflows, the
yearly inflows must be accumulated until the initial investment is recovered. Accept if Payback
Period lesser than economic life of the project.
Bluesea Lobster Payback Period
PAYBACK PERIOD OPERATING CASH INFLOW CUMULATIVE
1 1,651,189.78 1,651,189.78
2 2,176,562.31 3,827,752.09
3 Using P2,723,351.25 exceeds P6,488,237.40 6,551,103.34
Computation P6,488,237.40 - P2,176,562.31 = P2,660,485.32
Balance ÷ Last OCI 2,660,485.32 ÷ 2,176,562.31 = 1.22
Accumulated Years 2 years + 1.22= 2.22
PAYBACK PERIOD 3.22 years
Investment- Accumulated OCI 6,488,237.40 - 3,827,752.09 = 2,660,485.32
The computation above shows that the Bluesea Lobster can recover its initial investment within 3
years and (.22 x 12 months/year) 2.64 months which is lesser compared to the estimated 10-year economic
life of the project Therefore the project is considered acceptable.