CHAPTER 9: Capital Budgeting I. True or False Statements 1. True 11. False 21. True 31. False 41. False 51. True 2. False 12. True 22. False 32. Tue 42, True 52. False 3. True 13. False 23. False 33. False 43. True 4. False 14. True 24. False 34. Tue. 44. False 5. True 15. False 25. True 35. False 45. True 6. True 16. False 26. True 36. True 46. False 7. False 17. True, 27. False 37. False 47. Tue 8. False 18. True 28. True 38. True 48. False 9. False 19. True 29. True 39. False 49. False 10. True 20, False 30. False 40. False 50. False I. Multiple Choice Questions LA 11.D 21.3 31.B ALB 2.B 12.D 22.D 32.C 42a 3.D 13.€ 23.D 33.D 43.D 4c 14. 24. 34.C 44.€ 5B 15.8 25.B 35.C 45.C 6A 16.B 26.D 36.C 7. 17.D 27.D 37.A B.A 18. 28.A 38.D 9. 19.D 29.D 39.B 10.B 20.D 30.B 40.8 TIL. Multiple Choice Problems Le Year [Investment Recovered Unrecovered | Years Recovered 0 103,000.00 = 1 50,000.00 55,000.00 1 (50,000/50,000) 2 43,000.00 10,000.00 1 (45,000/45,000) 3 10,000.00 : (10,000/40,000) payback 2B Ave. Net Income 95,000/5 years 19,000.00 Accounting, % of Return _ | 19,000/105,0003.B 4.D 6B 1B 8D 9D 10.B 1B Year Cash Flows Present Value 1 50,000.00 40,500.00 2 45,000.00 29,250.00 3 40,000.00 20,800.00 4 35,000.00 14,700.00 5 0.34 30,000.00 10,200.00) Total PV of Cash Flows 115,450.00 Initial Investment 105,000.00 ‘Net Present Value Present Value (56,000*2.531) 141,736.00 Tnitial Investment 140,000.00 Net Present Value Present Value (20,000*2.531) 50,620.00 Initial Investment 50,000.00 Profit Index (50,620/50,000) | 69) PV Factor_| = Investment/Annual Cash Flows 68.337/27,000 py 3000082487 LS naaion 7) Payback Period =400,000/100,000 (2a) Present Value (142,000*4.355) 618,410.00 Initial Investment 600,000.00 Net Present Value ‘Accounting % of Retum 20,000 / (410,000/2) 20,000 / 205,000 PV Factor | 600,000/142,000 between 4.111] & 4.355512.€ Revenues 90,000.00 Operating Costs 38,000.00 Depreciation 40,000.00 78,000.00 Annual N. I 12,000.00 Accounting % of Return = 12,000/ (320,000/2) [75% 1 13.€ Net Income 12,000.00 Depreciation Expense 40,000.00 Annual Cash Flow 52,000.00 ‘Accounting % of Return 14.8 ‘Accounting % of Retum | Net Income/Average Investment {60,000 / (300,000+100.000) / (2) 15.€ Average Investment —_(80,000~4,000)/2 (42000500 16.B Year| PV Factor at 15% | Cash Flows | Present Value 1 0.8700 100,000.00 $7,000.00 2 0.7560 160,000.00 120.960.00 Total PV of Cash Flows | _207,960.00 | Year| PVFactorat14% | Cash Flows | Present Value 1 0.8700 15,000.00 13,050.00 2 0.7700 15,000.00 11,350.00 3 0.6700 10,000.00 6.700.00 Total PV of Cash Flows [31,300.00 | 18. Payback — = 200,000/40,000 a 19.B PVofPlat 12% =24,600*3.605 |EUSS68300))) 20.€ Payback = 600,000/225,000 ma 21.D22.B Present Value (7,300*4.355 at 10%) 31,791.50 Initial Investment 30,000.00 ‘Net Present Value 23.C Profitability Index (31,792/30,000) (06) 24.4 25.€ Savings on labor 8,000.00 ‘Less: Increase in power costs =1,000.00 Net savings 7,000.00 PV of 12% for 10yrs 5.65 PY of savings | (24) 39,550.00 | Less: Investment costs 30.000.00 ‘Net Present Value [259,550.00 | 26.D Tnvestment / Annual Cash Flow | = Factor of Time Adjusted Rate of Return 84,900/15,000 60 5.660 for 12 years is 14% 27.B Return in 5 years 10,000.00 factor for 12% for 5 years 0.567 PY (max. amount to invest) [S700] 28.C Year Amount | Factor at 18% PV Working capital present | 30,000.00 1.00 -30,000.00 Cash inflow 1-6 years | _ 10,000.00 3.50 34,980.00 ‘Working capital released 6 30,000.00 0.37 11.100.00 Net Present Value 29.B Payback Period —100,000/25,000 i31.B 32.4 33.B Year Investment | Expected Return | Balance (now) 1 50,000.00 ~50,000.00 2 20,000.00 _ | -30,000.00 3 20,000.00 | -10.000.00 4 50,000.00 -20,000.00 3 20,000.00 ~ ‘Net Income [30,000- {(100,000-10,000)/5}] 30,000-18,000 12,000.00 Accounting % of Return _| 12,000/ {(100,000~10.000)/2} 12,000/55.000 Depreciation Deduction * Tax Rate | Depreciation Tax Shield 50,000*30%6 PV of Cash Flow 50,000.00 Initial Investment 40,000.00 Profit Index (50,000/40,000) Payback = 30,000/6,000 [By Cash Flow. 6,000.00 Less: Depreciation (30,000/15 years) | 2.00.00 ‘Net Savings 4,000.00 Machine Cost 30,000.00 ‘Simple % of Retum 133% 200,000 Working Capital is an investment, it does not need tax adjustment