The following data apply to questions 1–4.

The Hilltop Corporation is considering (as of 1/1/12) the replacement of an old machine that is
currently being used.  The old machine is fully depreciated but can be used by the corporation
through 2016.  If Hilltop decides to replace the old machine, Baker Company has offered to
purchase it for $40,000 on the replacement date.  The disposal value of the old machine would
be zero at the end of 2016.  Hilltop uses the straight-line method of depreciation for all classes
of machinery.

If the replacement occurs, a new machine would be acquired from Busby Industries on January
2, 2012.  The purchase price of P500,000 for the new machine would be paid in cash at the time
of replacement.  Due to the increased efficiency of the new machine, estimated annual cash
savings of P125,000 would be generated through 2016, the end of its expected useful life.  The
new machine is expected to have a zero disposal price at the end of 2016.

All operating cash receipts, operating cash expenditures, and applicable tax payments and
credits are assumed to occur at the end of the year.  Hilltop employs the calendar year for
reporting purposes.

Discount tables for several different interest (discount) rates that are to be used in any
discounting calculations are given below.  Assume for questions 1–4 that Hilltop is not subject to
income taxes. 

Present Value of $1.00 Received at the End of Period Present Value of an Annuity of $1.00 Received at the End of
Each Period
Period 6% 8% 10% 12% 14% Period 6% 8% 10% 12% 14%

  1 .94 .93 .91 .89 .88 1 0.94 0.93 0.91 0.89 0.88
  2 .89 .86 .83 .80 .77 2 1.83 1.78 1.73 1.69 1.65
  3 .84 .79 .75 .71 .68 3 2.67 2.58 2.49 2.40 2.32
  4 .79 .74 .68 .64 .59 4 3.47 3.31 3.17 3.04 2.91
  5 .75 .68 .62 .57 .52 5 4.21 3.99 3.79 3.61 3.43

1. If Hilltop requires investments to earn an 8% return, the net present value for replacing the
old machine with the new machine is

a.   175,000. b.   50,000. c.  38,750. d.   (36,250).

2. The internal rate of return, to the nearest percent, to replace the old machine is

a.   12%. b.   10%. c.   8%. d.   6%.

3.  The payback period to replace the old machine with the new machine is

a.   2.5 years. b.   3.6 years. c.   4.0 years. d.   4.4 years.

4.The accrual accounting rate of return on the initial investment, to the nearest percent, is

a.   0%. b.   5.0.%. c.   5.6%. d.   28%.

 Use the following to answer questions 5-6:
Delley Inc. is considering the acquisition of equipment that costs P340,000 and has a useful
life of 6 years with no salvage value. The incremental net cash flows that would be generated
by the equipment are:
Incremental Net
Cash Flows
Year 94,000
Year 2           133,000
Year 3 96,000
Year 4           116,000
Year 5           115,000
Year 6             87,000
5. If the discount rate is 17%, the net present value of the investment is closest to:
A) 45,811
B) 385,811
C) 301,000
D) 117,341

6.. The payback period of this investment, rounded off to the nearest tenth of a year, is
closest to:
A) 3.9 years
B) 3.6 years
C) 3.1 years
D) 5.0 years

7. Lyben Inc. is planning to produce a new product.  To do this, it is necessary to acquire a new
equipment that will cost the company P100,000.  The estimated life of the new equipment is five
years with no salvage value.  The estimated income and costs based on expected sales of
P10,000 units per year are:
Sales @ P10.00 per unit P100,000
Costs @ P8.00 per unit 80,000
Net income P  20,000
The accounting rate of return based on initial investment is 20%
What will be the accounting rate of return based on initial investment of P100,000 if
management decrease its selling price of the new product by 10%? 
A. 5% B. 10% C. 15% D. 20%

8. The Sampaguita  Steam Laundry bought a laundry truck that can be used for 5 years.  The
cost of the truck is P225,000 with a salvage value of P35,000.  Since the truck is not working
efficiently, management has thought of selling the truck immediately and buy a delivery wagon
which will serve the company’s purposes more properly.  The estimated net returns of the truck
for 5 years is P150,000.  If the truck is sold, management can only recover P175,000.  (In all
calculations, use the straight line method of depreciation)

. The net gain (loss) that will arise if the Company decides to sell the truck is: 
a. P(50,000) b. P(75,000) c. P75,000 d. P140,000

9- 12.Given the following data :

Sales 100,000
Variable costs 60,000
Traceable fixed costs 10,000
Average invested capital 20,000
IMputed interest rate on average capital  12%
In addition,  consideration is given to the possible purchase of a P30,000 machine which result
in a decrease  of P12,000 per year in cash operating expenses. Useful life of the Mchine is five
years.
9. Before the purchase of the P30,000  machine, What is the return on in vestment ?
a.60% c. 138%
b. 75% d. 150%
10. Before the purchase of the P30,000 machine, What is the residual income ?
a. 27,600 c. 32,400
b. 30,000 d. 40,000
11. For the new machine, what is the accounting rate of return based on initial investment ?
a. 12% c. 30%
b. 20% d. 40%
12. What is the payback period  for the new machine ?
a. 1.67 years c. 4.17 years
b. 2.5 years d. 5.00 years
  13-14. The new equipment  costing P150,000  is expected to  produce  cash savings of
P33,000 per year in operating costs.  Cost of capital  is 16%. For ten periods at 16%,  the
present value of 1 is .227, while the present value of an ordinary annuity of 1 is 4.833.
13. What is the net present value of the proposed investment using a discount rate of 16%?
a. 9,489 c. 95,090
b. 24,050 d. 180,000

14. Based on the company’s initial investment, what is the accounting rate of return ?
a. 8% c.16%
b. 12% d. 25%

15-16.. The new car costs  P120,000 with an estimated useful life of five years. The old car  has
a book value of P15,000 and can be sold  at P12,000. The acquisition of the new car  will yield
annual cash savings  of P20,000 before income tax. Tax rate is 25 %.
15. What is the net investment of the new car ?
a. 108,000 c. 107,250
b. 108,750 d. 107,000
16. What is the payback period ?
a. 5.14 years c. 5.11 years
b. 5.18 years d. 5 years
17-19 The purchase of equipment worth P300,000 is needed to produce a new product. The
equipment has a useful life of five years. Straight line method of depreciation is used. Tax rate is
35%  additional data : Sales and costs estimates for the new product are as follows :
Annual sales 22,500
Selling price P35 per unit
Variable manufacturing costs                      P21 per unit
Fixed manufacturing costs( excluding depreciation) P37,500
Selling and administrative expenses P45,000
17. How much is the annual net income after tax ?
a. 86,250 c. 151,125
b. 112,125 d. 172,500
18. How much is the annual cash flow net ?
a. 112,125 c. 232,500
b. 172,125 d. 209,625
19. What is the payback period ?
a. 1.74 years c. 3.45 years
b. 2.68 years d. 5 years
20. Rose Company is planning to invest P40,000 in a three year project. Rose’s expected
rate of return  is 10%. The present value of P1 at 10% for one year is .909, for two years
is .826, aand for three years is .751. The cash flow net of income taxes will be P15,000
for the first year ( present value of 13,635), and P18,000 for the second year( present
value of P14, 868). Assuming the rate is exactly 10%, what would the cash flow, net of
income taxes, be for the third year ?
a. 8,634 c. 11,497
b. 11,000 d. 15,309