Institute of Business and Accountancy

ACT23 – Strategic Cost Management R.A.A. Hipolito, CPA

PLANNING FOR CAPITAL INVESTMENT QUIZZER

1. Diamond Co. is considering investing in new equipment that will cost P900,000 with a 10-year useful life.
The new equipment is expected to produce annual net income of P30,000 over its useful life. Depreciation
expense, using the straight-line rate is P90,000 per year. The payback period is
a. 7.5 years b. 7 years c. 7.2 years d. 8 years

Questions 2 and 3 are based on the following:

Madeline Company is proposing to spend P140,000 to purchase a machine that will provide annual cash
flows of P25,000. The appropriate present value factor for 10 periods is 5.65.

2. The net present value of the proposed investment is.

a. P1,250 b. P(1,250) c. P2,150 d. P(2,150)

3. Madeline should
a. Invest because NPV is positive P2,150. c. Invest because NPV is positive P1,250.
b. Invest because NPV is negative P2,150. d. Not invest because NPV is negative P1,250.

Questions 4 and 5 are based on the following:

Lake Front Co. is considering investing in a new dock that will cost P280,000. The company expects to use
the dock for 5 years, after which it will be sold for P150,000 at that time. Lake Front anticipates cash flows
of P50,000 resulting from the new dock and the company’s borrowing rate is 8%, while its cost of capital is
10%.

4. The net present value of the dock is

a. P2,768 b. P(6,278) c. P2,678 d. P(2,678)

5. Lake Front Should

a. Make investment because of NPV P2,678. c. Not invest because of NPV P(6,278).
b. Make investment because of NPV P2,768. d. Not invest because of NPV P(2,678).

Questions 6 through 8 are based on the following:

Mobil Co. has hired a consultant to propose a way to increase the company’s revenues. The consultant has
evaluated two mutually exclusive projects with the following information provided for each project:
Project Turtle Project Snake
Capital Investment P 790,000 P 440,000
Annual cash flows 140,000 80,000
Estimated useful life 10 years 10 years

Mobil Co. uses a discount rate of 9% to evaluate both projects.

6. Calculate the net present value of Project Turtle

a. P180,742 b. P(180,742) c. P(108,472) d. P108,472

7. Calculate the profitability index of Snake

a. 1.00 b. 1.41 c. 1.14 d. 1.17

8. Which project should Mobil accept?

a. Turtle because of P108,472 NPV. c. Snake because of P73,413 NPV.
b. Turtle because of profitability index of d. Snake because of profitability index of
P1.13. 1.17.

9. An investment costing P90,000 is being contemplated by Mint Co. The investment will have a life of 8
years with no salvage value and will produce annual cash flows of P16,870. What is the appropriate
internal rate of return associated with this investment?
a. 5.33 b. 5.23 c. 4.33 d. 4.23
ACT23_AY2223_S1_Handout No. 13 1|2
 Institute of Business and Accountancy
ACT23 – Strategic Cost Management R.A.A. Hipolito, CPA
10. Salt Co. is considering investing in a new facility to extract and produce salt. The facility will increase
revenues by P240,000, but will also increase annual expenses by P160,000. The facility will cause
P980,000 to build, but will have a salvage value of at the end of its 20-year useful life. The annual rate
of return on this facility is
a. 15% b. 18% c. 16% d. 20%

Questions 11 trough 14 are based on the following:

Corn Dogs, Inc. produces and sells corn dogs. The corn dogs are made by hand. Austin Beagle, production
manager, is considering purchasing a machine that will make the corn dogs. Austin has shopped for machines
and found that a machine he wants will cost P262,000. In addition, Austin estimates that the new machine
will increase the company’s annual net cash inflows by P42,400. The machine will have a 12-year useful life
and no salvage value.

11. Calculate the cash payback period.

a. 6.18 years b. 6.73 years c. 5.18 years d. 5.73 years

12. Calculate the machine’s internal rate of return

a. 13% b. 12% c. 10% d. 20%

13. Calculate the machine’s net present value using a discount rate of 10%.
a. P29,600 b. P26,900 c. P20,600 d. P26,000

14. Assuming Corn Dogs, Inc.’s cost of capital is 10%, is the investment acceptable?
a. YES because of +NPV and IRR greater than 10%.
b. YES because of +NPV and IRR of 10%.
c. NO because of – NPV and IRR of less than 10%.
d. NO because of – NPV but IRR of 12%.

Questions 15 through 17 are based on the following:

Top Growth Farms, a farming cooperative, is considering purchasing a tractor for P475,000. The machine
has a 10-year life and an estimated salvage value of P27,500. Delivery costs and set-up charges will be
P12,100 and P400, respectively. Top Growth uses a straight-line depreciation.

Top Growth estimates that the tractor will be used five times a week with the average charge to the individual
farmers of P400. Gas is P25 for each use of tractor. The present value of an annuity of 1 doe 10 years at
9% is 6.418.

15. The cash payback period is

a. 5 years b. 6 years c. 7 years d. 8 years

16. The net present value is

a. P138,255 b. P(138,255) c. P133,255 d. P(133,255)

17. The annual rate of return is

a. 20% b. 21% c. 22% d. 18%

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ACT23_AY2223_S1_Handout No. 13 2|2