Christian John R.

Biol

ACTIVITY 5: WRITTEN EVALUATION

 Write your answers on a white paper.
 Take a clear picture and submit to your instructor via messenger.

1.Your rich uncle has offered you two living trust payouts for the rest of your life. The positive
cash flows of each trust are shown below. If your personal MARR is 10% per year, which trust
should you select?
EOY Trust A Trust B
0 0 0
1-10 P50,000 60,000
11-infinity 75,000 65,000
Note: At 10% per year interest, infinity occurs when N = 80 years

Trust A
75,000
PWA = 50, 000(P/A, 10%, 10) + (P/F, 10%, 10)
0.1
PWA = 50, 000 * 6.144567 + 750, 000 * 0.385543
PWA = 307,228.3 + 289,157.40
PWA= PHP 596,385.70

Trust B
65,000
PWB = 60, 000(P/A, 10%, 10) + (P/F, 10%, 10)
0.1
PWB = 60, 000 * 6.144567 + 650,000 * 0.385543
PWB = 368,674 + 250.603.1
PWB = PHP 619,277.10

Present value of Trust B is high so select

Now when n= 80
Trust A
PWA = 50,000(P/A, 10%, 10)+75,000(P/A, 10%, 70)(P/F, 10%, 10)
PWA = 50, 000 * 6.144567 + 75, 000 * 9.987337 * 0.385543
PWA = PHP 596,019.10

Trust B
PWB = 60, 000 * 6.144567 + 65, 000 * 9.987337 * 0.38554
PWB = PHP 618,959.80
So we can see when n = 80 then also trust
B is better than trust A.
2.The Petron Oil Company must install anti-pollution equipment in a new refinery to meet the Philipine
clean-air standards. Four design alternatives are being considered, which will have capital investment
and annual operating expenses as shown in the table below.
Assuming a useful life of 8 years for each design, no market value, a desired MARR of 10%
per year, determine which design should be selected on the basis of the PW method.
Confirm your selection by using the FW and AW methods.
Design Capital investment Annual expenses
D1 P600,000 P780,000
D2 760,000 728,000
D3 1,240,000 630,000
D4 1,600,000 574,000

FW(10%)= -600,000(F/P,10%,8)-780,000(F/A,10%,8)
= -600,000(2.1436) – 780,000(11.4359)
= -1,286,144 - 8,920,002
FWD1 = -10,206,146
FW(10%)= -760,000(F/P,10%,8)-728,000(F/A,10%,8)
= -760,000 (2.1436) - 728,000(11.4359)
= -1,629,119 - 8,325,335
FWD2 = -9,954,454
FW(10%)= -1,240,000(F/P,10%,8)-630,000(F/A,10%,8)
= -1,240,000 (2.1436) -630,000 (11.4359)
= -2,658,042-7,204,617
FWD3 = -9,862,659
FW(10%)= -1,600,000(F/P,10%,8)-574,000(F/A,10%,8)
= -1,600,000 (2.1436) -574,000 (11.4359)
= -3,429,735 -6,564,206
FWD4 = -9,993,941
AW(10%)= -600,000(A/P,10%,8)-780,000
= -600,000(0.1874)-780,000
= -112,440-780,000
AWD1 = -892,440

AW(10%)= -760,000(A/P,10%,8)-728,000
= -760,000(0.1874)-728,000
= -142,424-728,000
AWD2 = -870,424
AW(10%)= -1,240,000(A/P,10%,8)-630,000
= -1,240,000(0.1874)-630,000
= -232,376-630,000
AWD3 = 862,376

AW(10%)= -1,600,000(A/P,10%,8)-574,000
= -1,600,000(0.1874)-574,000
= -299,840-574,000
AWD4 = 873,840

I'd go with design 3 because it has the lowest AW and FW, which I calculated based on the amount.
3.Spreadsheet exercise
Louie is an ASSCAT student who desires to establish a long-term fund with P200,000 that his
grandmother gifted to him. He intends to invest the money in a mutual fund that earns an
expected 5% per year on his account.
The sales agent advices him of the existing two choices; Class A and Class B accounts.
For Class A account, there is a 5% up-front commission (payable now) on a which every year
thereafter then charges a 0.61% management fee.
For Class B account which has no up-front commission, but its management fee is 2.35% in
year one, 0.34% in year two, and 1.37% per year thereafter.
Set up a spreadsheet to determine how many years are required before the worth of the
Class A account overtakes (is preferred to) the Class B account.
4.An asset purchased for P2.5M has a depreciable life of 5 years, and it has a
Salvage value of P250,000 at the end of its depreciable life.
With the straight-line (SL) method of depreciation, what is the asset’s book value at the end of year 3?

Depreciation per year will be (P2.5M – P250,000)/5 = P450,000

The book value at end of year three will be P2.5M – 3 (P450,000) = P1,150,000. Notice that the book
value at the end of year five is P2.5M – 5 (P450,000) = P250,000

D3= P 2.5 M −P250,000 /5=¿ P450,000

D*3= P 2.5 M −P250,000 /5 x 3= P 1,350,000

BV3= P 2.5 M −P1,350,000=P1,150,000

5.During a particular year, a corporation has P18.6 million in revenue, P2.4 million of
operating expenses, and depreciation expenses of P6.4 million.
What is the approximate tax this corporation will have to pay for this tax year?

Hence,

Taxable income = Gross income − All expenses except capital investments − Depreciation
deductions

P18.6 million- P2.4 million- P6.4 million= P9,800,000

 6.A new municipal refuse collection vehicle can be purchased for P84,000. Its expected useful
life is 6 years, at which time the Salvage Value (SV) and Book Value (BV) will be zero.
Before-tax Cash Flow (BTCF) will be +P18,000 per year over the 6-year life of the vehicle.
a. Use straight-line (SL) depreciation, an effective income tax rate of 40% and an after-tax
MARR of 12% to determine the present worth of the investment.
B. Is this vehicle a sound investment? Explain youranswer.

EOY BTCF Depreciation Taxable Income Tax ATCF

Income

0 –P84,000 – – – –P84,000

1–6 18,000 P14,000 P4,000 –P1,600 16,400

8 0 – – 0

Solution:

PW(12%)  =  –P84,000 + P16,400 (P/A, 12%, 6) = –P16,573

(b)  0  =  –P84,000 + P16,400 (P/A,iˊ %, 6)

 From Goal Seek in Excel, iˊ % = 4.7%

Goal Seek Setup:

Cell A1 = 0.12 (initial guess)

Cell B1 = –84000 + PV(A1, 6, –16400)

Set Cell B1 = 0 by changing Cell A1

B. Because the PW is negative, the IRR is substantially lower than the MARR, and the
payback period is six years, this vehicle is not a good investment which is too long.
7.Spreadsheet exercise
A bowling alley costs P500,000 and has a useful life of 10 years. Its estimated MV at the end of
year 10 is P20,000. TheMARR is 10% per year.
Create a spreadsheet that calculates the depreciation for years 1–10 using:
(i) the SL method
(ii) the 200% DB method