CAPITAL BUDGETING –

PRACTICE PROBLEMS
FPPT.com
NET PRESENT VALUE – UNIFORM CASH FLOWS
 NET PRESENT VALUE – UNIFORM CASH FLOWS

Now Company plans to buy a new machine

costing P580,000, excluding freight and
installation costs of P70,000. If the new
machine is acquired, the company would have
to increase its inventory level by P30,000. The
new machine is expected to have a salvage
value of P20,000 at the end of its economic life
of 5 years, at which time the company’s
inventory level would be brought back to the
original level. The annual after-tax cash inflows
from this machine have been estimated at
P150,000. The tax rate is 30%. The company
desires a minimum of10% on invested capital.

REQUIRED: Compute the net present value

(NPV).
 NET PRESENT VALUE WITH UNEVEN CASH FLOWS.

Ngayonna Company is evaluating a capital

investment proposal that will require an
initial cash investment of P250,000. The
project will have a three-year life. The net
after tax cash flows from the project are
expected to be P180,000 in the first year,
P120,000 in the second year, and P80,000
in the third year. Salvage value of P10,000
is expected to be received at the end of
the life of the project. The straight-line
method will be used to depreciate
the project. Income tax rate is 30%, and
the company’s cost of capital is 20%.
REQUIRED: What is the net present value?
 PROFITABILITY INDEX

Bentong Corporation gathered the following data on two capital investment opportunities:
1 2
Cost of investment P270,000 P480,000
Present value of cash inflows discounted at 10% 336,140 567,270
Net present value 66,140 87,270
Life of the project 6 years 6 years
Internal rate of return 18% 16%

The company’s required rate of return is 10%; thus, a 10% discount rate has been used in the present value calculations for
the two investment opportunities. Limited funds are available for investment, so the company cannot accept both projects.

REQUIRED:
1. Using the net present value method, which alternative is more attractive?
2. Using the profitability index method, which alternative is more attractive?
 PROFITABILITY INDEX

Bentong Corporation gathered the following data on two capital investment opportunities:
1 2
Cost of investment P270,000 P480,000
Present value of cash inflows discounted at 10% 336,140 567,270
Net present value 66,140 87,270
Life of the project 6 years 6 years
Internal rate of return 18% 16%

The company’s required rate of return is 10%; thus, a 10% discount rate has been used in the present value calculations for the two investment
opportunities. Limited funds are available for investment, so the company cannot accept both projects.

REQUIRED:
1. Using the net present value method,
which alternative is more attractive?

2. Using the profitability index method,

which alternative is more attractive?
 INTERNAL RATE OF RETURN /
DISCOUNTED CASH FLOW RATE OF RETURN/
TIME ADJUSTED RATE OF RETURN
Meemon Drapery Service is investigating the
purchase of a new machine for cleaning
drapes. The machine would cost P260,000,
including freight and installation cost of
P5,000. Meemon has estimated that the new
machine would increase the company’s after-
tax net cash inflows by P80,000 per year. The
machine would have a five-year useful life
and no salvage value. The company desires a
minimum return of 10% on invested capital.

REQUIRED:
1. Net present value using the company’s
desired rate of return.
2. Internal rate of return
 INTERNAL RATE OF RETURN /
DISCOUNTED CASH FLOW RATE OF RETURN/
TIME ADJUSTED RATE OF RETURN
DISCOUNTED CASH FLOW RATE OF RETURN WITH UNEVEN
CASH FLOWS. Wheeler Company wants to buy a numerically
controlled (NC) machine to be used in producing
components for manufacturers of trenching machines. The
outlay required is P100,000. The NC equipment will last five
years with no expected salvage value. The expected after-tax
net cash inflows associated with the project follow:

First year P30,000

Second year 40,000
Third year 50,000
Fourth year 20,000
Fifth year 10,000

REQUIRED: Determine the time-adjusted rate of return.

 PAYBACK RECIPROCAL
Owu Company is planning to buy an
equipment costing P800,000 which
has an estimated life of 20 years and
is expected to produce after-tax net
cash inflows of P150,000 per year.

REQUIRED: Estimate the discounted

cash flow rate of return without
using present value factors.
 DISCOUNTED PAYBACK
A new machine costing P600,000 with three
years useful life, no salvage value at the end
of three years, is expected to bring in the
following cash inflows after tax:

First year P310,000

Second year 300,000
Third year 250,000

REQUIRED: If the company’s cost of capital is

10%, what is the discounted payback period?