Quiz On Cap Budg

1.
If an asset costs 35,000 and is expected to have a P5,000 salvage value at the end of its 10 year
life, and generates annual net cash inflows of P5,000 each year, the payback period is?
a. 8 years
b. 7 years
c. 6 years
d. 5 years
2. Umali Corporation is considering an investment in a new cheese cutting machine to replace its
existing cheese cutter. Information on the existing machine and the replacement machine
follow:
Cost of the new machine P400,000
Net annual savings in operating costs 90,000
Salvage Value now of the old machine 60,000
Salvage value of the old machine in 8 Years 0
Salvage Value of the new machine in 8 years 50,000
Estimated life of the new machine 8 years
What is the expected payback period for the new machine?

a. 4.44 years
b. 8.50 years
c. 2.67 years
d. 3.78 years
3. Consider a project that requires cash outflow of P50,000 with a life of 8 years and a salvage
value of P5,000. Annual before-tax cash inflow amounts to P10,000. Salvage value is ignored in
computing depreciation. Assuming a tax rate of 30% and a required rate of return of 8%, what is
the payback period of the project?
a. 5.0 years
b. 5.6 years
c. 6.0 years
d. 6.6 years
4. Vinson Industries, Inc. requires all its capital investment projects to have a payback period of 5
years or shorter. Vinson is currently considering an equipment purchase that has an initial cost
of P900,000. The equipment is expected to have a ten-year life and a salvage value of P50,000.
Assuming cash flows are equal, how much annual cash inflows are necessary in order to meet
the payback period requirement?
a. 180,000
b. 170,000
c. 190,000
d. 90,000
5. The Dwight Company plans to invest in a duplicating machine that costs P120,000. The following
are the expected annual cash inflows that are evenly received each month and the estimated
salvage value at any point of each year.
Year Cash Inflows Salvage Value
1 40,000 50,000
2 36,000 40,000
3 32,000 28,000
4 28,000 20,000
5 25,000 5,000
What is the bail-out period for this project?
a. 2.50 years
b. 2.43 years
c. 2.57 years
d. 1.83 years
6. Camel Company invests in a machine with a useful life of 6 years and no salvage value. The
machine will be depreciated using the straight-line method. It is expected to produce annual
cash inflow from operations, net of income taxes of P6,000. Assuming that Camel uses a time-
adjusted rate of return of 10%, how much is the original investment?
a. P10,640
b. P29,510
c. P22,750
d. P26,130
7. The Miracle Company is planning to purchase a new machine which it will depreciate for book
purposes, on a straight-line basis over a ten-year period with no salvage value and a full year’s
depreciation taken in the year of acquisition. The new machine is expected to produce cash
flows from operations, net of income taxes, of P66,000 a year in each of the next 10 years. The
accounting rate of return on the initial investment is expected to be 12%. How much will the
new machine cost?
a. 300,000
b. 660,000
c. 550,000
d. 792,000
8. The Leisure Company is considering the purchase of electronic pinball machines to be installed
in various amusement houses. The machines would cost a total of P300,000, have an eight-year
useful life, and have a total salvage value of P20,000 upon its retirement. Based on the
experience with other equipment, the company estimates that annual revenues and expenses
associated with the machines would be as follows:
Revenues from use P200,000

Less: Operating Expenses
Commissions to amusement houses P100,000
Insurance 7,000
Depreciation 35,000
Maintenance 18,000 160,000
Net Income P40,000
Ignoring the effect of income taxes, the payback period for the pinball machines would be
a. 3.7 years
b. 3.2 years
c. 4.0 years
d. 7.5 years
9. Pale Products Company is considering the purchase of a new machine. The estimated cost of the
machine is P300,000. The machine is not expected to have a residual value at the end of four
years. The machine is expected to generate annual cash inflows for the next four years as
follows:
Year Annual Cash Inflow
1 P150,000
2 P120,000
3 P90,000
4 P50,000
Pale products has a policy of accepting a project only if it has a payback period of not longer
than 3 years. What is the expected payback period for this project?
a. 2.93 years
b. 2.33 years
c. 3.00 years
d. 3.60 years
10. Michael Corporation is planning to buy production machinery costing P380,000. The machine’s
estimated useful life is 5 years, with a residual value of P5,000 at the end of its useful life.
Michael Corporation requires a rate of return of 20% and has calculated the following annual
cash inflows, net of income tax, pertaining to the operations of the new machine
Year Annual Net Cash Inflows
1 P240,000
2 120,000
3 80,000
4 80,000
5 80,000
The machines net present value?
a. 390,240
b. 370,240
c. 400,240
d. 405,240
11. Arthur Corporation is planning to invest P600,000 in a 5- year project. The project is expected to
produce annual net cash inflows, net of income taxes, P150,000. The company’s desired rate of
return for investment projects of this type is 10%.
What is the exact IRR for this investment project?
a. 6%
b. 8%
c. 7%
d. 7.94%

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What is the expected payback period for the new machine?

Revenues from use P200,000

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