Chapter 2: Capital Budgeting/Investment Decisions

Question 1

3 Financing Coverage

Answer 1

1. Investment Decision
2. Financing Decision
3. Dividend Decision

Question 2

May be defined as decision-making, firms evaluate purchased of major-fixed assets (building, machinery and equipment). To determine required return from a project.

Answer 2

Capital Budgeting

Question 3

Significance of Capital Budgeting

Answer 3

1. Long term effects
2. Timing the availability of Capital assets
3. Quality of capital assets
4. Raising funds
5. Ability to compete

Question 4

Some Difficulties in Capital Budgeting

Answer 4

1. Measurement problem
2. Uncertainty

Question 5

Project classifications

Answer 5

1. Mandatory investment
2. Replacement
3. Expansion project
4. Diversification project
5. Research & Development projects

Question 6

Capital budgeting evaluation techniques

Answer 6

1. non-discounting methods
2. Discounting method

Question 7

Non-discounting methods

Answer 7

1. Urgency
2. Payback period
3. Accountng rate of return

Question 8

Discounting methods

Answer 8

1. Net Present Value
2. Profitability Index
3. Internal Rate of return

Question 9

It refer to the length of period required to recover the cost of investment

Answer 9

Payback period

Question 10

Formula of Payback period

Answer 10

Intial cost of investment / Annual cash inflow

Question 11

Find Payback Period

Given:
Year 0 = 5,000,000
Year 1 = 2,000,000
Year 2 = 2,500,000
Year 3 = 3,500,000
Year 4 = 2,000,000
Year 5 = 2,000,000

Answer 11

Year 1 = 2,000,000 = 1
Year 2 = 2,500,000 = 1
Year 3 = (5,0000,000 - 4,500,000) / 3,500,000 = 0.14

PP = 2.14 years

Question 12

Find Payback Period

Given:
Intial Capital = 3,000,000
Year 1 = 1,200,000
Year 2 = 1,200,000
Year 3 = 1,200,000
Year 4 = 1,200,000
Year 5 = 1,200,000

Answer 12

Year 1 = 1,200,000 = 1
year 2 = 1,200,000 = 1
Year 3 = (3,000,000-2,400,000) / 1,200,000 = 0.5

PP =. 2.50 years

Question 13

Find Payback Period

Given:
Intial Capital = 30,000,000
Year (1-5) = 5,000,000 per year
Year (6-10) = 6,000,000 per year

Answer 13

Year 1 - 5 = 25,000,000 (5M x 5 years) = 5
Year 6 = 5,000,000 / 6,000,000. = 0.83

PP = 5.83 years

Question 14

Formula of Accounting rate of return (ARR)

Answer 14

Average income after tax / Initial cost of investment

Question 15

Formula of Net Present Value

Answer 15

Present Value - Cash outflow

Question 16

Formula of Profitability Index

Answer 16

Present value of cash inflow (PVCI) / Initial cost of investment

Question 17

Find Payback Period

Given:
Intial Capital = 800,000
Year 1 = 300,000
Year 2 = 350,000
Year 3 = 450,000
Year 4 = 500,000
Year 5 = 800,000

Answer 17

Year 1 = 300,000 = 1
Year 2 = 350,000 = 1

Year 3 = (800K- 300K - 350K) / 450,000 = 0.33

Answer = 2.33 years

Question 18

Find Net Present Value

Given:
Intial Capital = 800,000
Year 1 = 300,000
Year 2 = 350,000
Year 3 = 450,000
Year 4 = 500,000
Year 5 = 800,000

Rate = 8%

Answer 18

Year 1 = 300,000 x 0.9259 = 277,770
Year 2 = 350,000 x 0.8573 = 300,055
Year 3= 450,000 x 0.7938 = 330, 210
Year 4 = 500,000 x 0.7350 = 367,500
Year 5 = 800,000 x 0.6806 = 544,480

(PVCI) 1,820,015 - (PVCO) 800,000
NPV = 1,020,015

Question 19

Find Profitability Index

Given:
Intial Capital = 800,000
Year 1 = 300,000
Year 2 = 350,000
Year 3 = 450,000
Year 4 = 500,000
Year 5 = 800,000

Answer 19

notebook

Question 20

Find Discounted Payback Period

Given:
Intial Capital = 800,000
Year 1 = 300,000
Year 2 = 350,000
Year 3 = 450,000
Year 4 = 500,000
Year 5 = 800,000

Answer 20

Notebook

Question 21

Solve the missing numbers (found in notebook)

Answer 21

Notebook

Question 22

Find Accounting Rate of Return

Initial Investment = 1,500,000
Income Tax = 273,000 (Year 1)
448,000 (Year 2)

Answer 22

ARR = ((273,000 + 448,000) / 2) / 1,500,000

= 24.03%

Question 23

Find Internal rate of Return

Given:
Intial Capital = 800,000
Year 1 = 300,000
Year 2 = 350,000
Year 3 = 450,000
Year 4 = 500,000
Year 5 = 800,000

Rate = 8%

No need to study since it will not come out to the exam

Answer 23

Notebook

Question 24

Find Internal rate of return

Given:
Intial Capital = (350,000)
Year 1 = 100,000
Year 2 = 200,000
Year 3 = 220,000
Year 4 = 80,000

Answer 24

Found in notebook

Question 25

Find NPV (use excel) Given: Intial Capital = (20,000,000) Year 1 = 5,000,000 Year 2 = 8,000,000 Year 3 = 8,500,000 Year 4 = 7,000,000 Year 5 = 8,000,000 Year 6 = 6,000,000 Required rate of Return = 20%

Answer 25

Year 1 = 5,000,000 x 0.8333 = 4,166,500 Year 2 = 8,000,000 x 0.6944 = 5,555,200 Year 3 = 8,500,000 x 0.5787 = 4,918,950 Year 4 = 7,000,000 x 0.4823 = 3,376,100 Year 5 = 8,000,000 x 0.4019 = 3,215,200 Year 6 = 6,000,000 x 0.3349 = 2,009,400 (PVCI) 23,241,350 - (PVCO) (20,000,000) NPV =

Question 26

Find IRR (use excel) Given: Intial Capital = (20,000,000) Year 1 = 5,000,000 Year 2 = 8,000,000 Year 3 = 8,500,000 Year 4 = 7,000,000 Year 5 = 8,000,000 Year 6 = 6,000,000

Answer 26

Found in Excel

Question 27

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the: a. Payback period

Answer 27

Found in Test #2

Question 28

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the: b. Net Present Value

Answer 28

Found in Test #2

Question 29

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the: b. Net Present Value

Answer 29

Found in Test #2

Question 30

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the: c. Profitability Index

Answer 30

Found in Test #2

Question 31

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the: d. Discounted payback period

Answer 31

Found in Test #2

Question 32

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the: e. Internal rate of return

Answer 32

Found in Test #2

Question 33

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the: f. whether to accept or reject this investment. The minimum required rate of return of the company is 16% on all capital investments.

Answer 33

Found in Test #2

Question 34

The following are the expected cash inflow of a project whose economic life is 5 years and initial investment is P800,000 and discount rate of 18% Year 0 = (800,000) 1 = 300,000 2 = 350,000 3 = 300,000 4 = 250,000 5 = 250,000 Find the: a.) Payback period

Answer 34

Found in Test #2

Question 35

The following are the expected cash inflow of a project whose economic life is 5 years and initial investment is P800,000 and discount rate of 18% Year 0 = (800,000) 1 = 300,000 2 = 350,000 3 = 300,000 4 = 250,000 5 = 250,000 Find the: b.) NPV (discount rate is 12%)

Answer 35

Found in Test #2

Question 36

The following are the expected cash inflow of a project whose economic life is 5 years and initial investment is P800,000 and discount rate of 18% Year 0 = (800,000) 1 = 300,000 2 = 350,000 3 = 300,000 4 = 250,000 5 = 250,000 Find the: c.) Profitability Index (discount rate is 12%)

Answer 36

Found in Test #2

Question 37

The following are the expected cash inflow of a project whose economic life is 5 years and initial investment is P800,000 and discount rate of 18% Year 0 = (800,000) 1 = 300,000 2 = 350,000 3 = 300,000 4 = 250,000 5 = 250,000 Find the: b.) IRR (discount rate is 12%)

Answer 37

Found in Test #2

Question 38

The following are the expected cash inflow of a project whose economic life is 5 years and initial investment is P800,000 and discount rate of 18% Year 0 = (800,000) 1 = 300,000 2 = 350,000 3 = 300,000 4 = 250,000 5 = 250,000 Find the: e.) Will you recommend for the acceptance of the project?

Answer 38

Found in Test #2

Question 39

For a project that has an initial investment of P8.7 million, your client has asked you to determine the accounting rate of return. The data are the following: 1. Sales revenue: 30M (2022) 2. Cost of Cost: 40% 3. Interest Expense: 16% of the outstanding debt of P5,000,000 4. Tax rate: 30% 5. Operating expenses as 10M 6. It was learned that the income after tax in the preceding year was 10% lower than this year, 2022

Answer 39

Found in Test #2

Question 40

ABC is contemplating on venturing a new business with initial investment of P800 million pesos. The weighted average cost of capital (WACC) was determined at 15%. It has the following cash flows with zero salvage value at the end of the project: Year 1 = P50M Year 2 = P100M Year 3 = P150M Year 4-15 = P200M per year Given the information, this client asked you to provide the following: a.) Payback period of the project

Answer 40

Found in Test #2

Question 41

ABC is contemplating on venturing a new business with initial investment of P800 million pesos. The weighted average cost of capital (WACC) was determined at 15%. It has the following cash flows with zero salvage value at the end of the project: Year 1 = P50M Year 2 = P100M Year 3 = P150M Year 4-15 = P200M per year Given the information, this client asked you to provide the following: b.) Net Present Value (WACC = 15%)

Answer 41

Found in Test #2

Question 42

ABC is contemplating on venturing a new business with initial investment of P800 million pesos. The weighted average cost of capital (WACC) was determined at 15%. It has the following cash flows with zero salvage value at the end of the project: Year 1 = P50M Year 2 = P100M Year 3 = P150M Year 4-15 = P200M per year Given the information, this client asked you to provide the following: c.) Discounted payback period

Answer 42

Found in Test #2

Question 43

ABC is contemplating on venturing a new business with initial investment of P800 million pesos. The weighted average cost of capital (WACC) was determined at 15%. It has the following cash flows with zero salvage value at the end of the project: Year 1 = P50M Year 2 = P100M Year 3 = P150M Year 4-15 = P200M per year Given the information, this client asked you to provide the following: d.) Profitability Index

Answer 43

Found in Test #2

Question 44

ABC is contemplating on venturing a new business with initial investment of P800 million pesos. The weighted average cost of capital (WACC) was determined at 15%. It has the following cash flows with zero salvage value at the end of the project: Year 1 = P50M Year 2 = P100M Year 3 = P150M Year 4-15 = P200M per year Given the information, this client asked you to provide the following: e.) Internal rate of return

Answer 44

Found in Test #2

Question 45

Who are you?

Answer 45

A CPA, Lawyer, Doctor, RMT, Master degree holder and has 3 certifications in belt.