ILLUSTRATIVE PROBLEMS

CAPITAL BUDGETING - NON DISCOUNTED TECHNIQUES

PROBLEM 1
Yuto Corporation iis planning to install new machines with a cost of 500,000. It is estimated that
these machines will generate annual sales of 120,000 with a contribution margin of 90,000.
Fixed cost amounted at 30,000 per year. The estimated economic useful life of the machine
would be nine years with salvage value of 50,000 and depreciated using straight line method.
Yuto Corporation is subject to 30% income tax rate.

REQUIRED:
1. Determine the payback period.
2. Determine the accounting rate of return based on:
a. Original investment
b. Average investment
PROBLEM 2
Katy P Company has an investment opportunity costing P 120,000 that is expected to yield the
following cash flows over the next five years:

YEAR AMOUNT SALVAGE VALUE

1 40,000 15,000
2 35,000 10,000
3 50,000 20,000
4 65,000 20,000
5 60,000 15,000

REQUIRED: Assuming a hurdle rate of 30%, determine:

A) Payback period
B) Bail out period
B) Accounting rate of return
PROBLEM 3
Lagonoy Company has invested in a machine that cost P 70,000, that has a useful life of seven
years, and that has no salvage value at the end of its useful life. If the machine has a payback
period of four years, then the simple rate of
return on the machine is closest to:
a. 7.1% c. 10.7%
b. 8.2% d. 39.3%
PROBLEM 4
Kino Inc. has the following data about a project he’s been eyeing on.
OLD NEW
COST 300,000 600,000
CASH OPERATING COSTS 70,000 60,000
ANNUAL DEPRECIATION 30,000 60,000

Additional Information:
a)Income tax, 30%
b)The new equipment invested for the new project cost excludes the amount of freight and
installment of 2,000 and 10,000 respectively.
c) Repair cost of the old equipment amounted to 12,000 every year and 10,000 is expected to
be the repair cost for the new equipment.
d)The old equipment is bought two years ago. Salvaged for 200,000.
e)Reduction in working capital amounted to 13,500.
f) Useful life of the new equipment is 6 years.

REQUIRED:
1. Determine the net investment.
2. Determine the annual cash flow after tax.
3. Determine the payback period.
4. Determine the accounting rate of return (simple).

PROBLEM 5
Joan Company purchased a new machine on January 1, 2024 for 300,000 with an estimated
useful life of 5 years and a salvage value of 30,000. The machine will be depreciated using
straight line method. The machine is expected to produce the following cash flow from
operations, net of income taxes:

YEAR AMOUNT
1 80,000
2 90,000
3 60,000
4 30,000
5 80,000
The new machine’s salvage value is 30,000 in years 1 and 2, and 20,000 in years 3 and 4.

REQUIRED:
1. Determine the payback period.
2. Determine the bail out period.
PROBLEM 6
Jengga Corporation is considering the acquisition of a new machine. The machine can be
purchased for P 90,000; it will cost P 6,000 to transport to Misibis plant and P 9,000 to install. It
is estimated that the machine will last 10 years, and it is expected to have an estimated salvage
value of P 5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year,
each with a selling price of P 500 and combined material and labor costs of P 450 per unit. Tax
regulations permit machines of this type to be depreciated using the straight-line method over 5
years with 3,000 estimated salvage value. Misibis has a marginal tax rate of 40%.

REQUIRED:
1. Determine the payback period.
2. Determine the ARR.
3. Show solution.