TRUE OR FALSE

1. The time value of money is ignored in both the rate of return and the payback methods.
2. The present value of a future cash flow is always less than the future amount.
3. The most desirable investment is the one with the lowest net present value.
4. If the sum of the present value of all future cash flows related to a proposed capital expenditure
discounted at the company’s cost of capital is positive, it indicates that the return on the
investment exceeds the company’s cost of capital.
5. Under the present value method, there is no need for a minimum desired rate of return
6. The bailout period considers the net salvage value of the capital expenditure.
7. If the net present value (NPV) of a capital expenditure is positive based on the company hurdle
rate of 12%, the internal rate of return would be less than 12%.
8. The profitability index (excess not present value index ) is computed by ignoring the time value
of money.

A. B. C. D.

1. Prac Co. is planning to spend P84,000 for new machine which it will depreciate on the
straight-line basis over ten years with no salvage value. The related cash flow from
operations, net of income tax, is expected to be P10,000 a year and P12,000 for each of the
next four years. What is the payback period?

A. 4.4 years B. 7.6 years C. 8.0 years D.

2. Don, Inc, purchased a new machine for P60,000 on January 1,2001. The machine is being
depreciated on the straight-line basis over five years with no salvage value. The accounting
(book-value) rate of return is expected to be 15% on the initial increase is required
investment. Assuming a uniform cash flow, this investment is expected to provide annual
cash flow from operations, net of income tax of

A. P12,000 B. P13,800 C. P21,000 D.

3. Swing Company is planning to purchase a new machine for P600,000. The new machine will
be depreciated on a straight-line basis over a six-year period with no salvage, and a full
year’s depreciation will be taken in the year of acquisition. The new machine is expected to
produce cash flow from operations, net of income tax, of P150,000 a year in each of the
next six years.
The accounting (book-value) rate of return on the initial investment is expected to be:

A. 8.3% B. 12.0% C. 16.7% D.

4. Axel Corp. is planning to buy a new machine with the expectation that this investment
should earn a discounted rate of return of at least 15% .This machine , which costs
P150,000, would yield an estimated net cash flow of P30,000 a year for 10 years, after
 income tax . In order to determine the net present value of buying the new machine, Axel
should first multiply the P30,000 by which of following factors?

A. 5.019(Present B. 4.046 (Future C. 0.247 (Present D.

value of an amount of P1) value of P1)
ordinary annuity
of P1)

5. Hillside Company purchased a machine for P480,000. The machine has a useful life of six
years and no salvage value. Straight-line depreciation is to be used. The machine is
expected to generate cash flow from operations, net of income tax, of P140,000 in each of
the six years. Hillside’s desired rate of return is 14%. Information on present value factors is
as follows:

Period Present value of P1 at 14% Present value of ordinary annuity of P1 at 14%

1 .877 .877
2 .769 1.647
3 .675 2.322
4 .592 2.914
5 .519 3.433
6 .456 3.889
What would be the net present value?

A. P63,840 B. P64,460 C. P218,880 D.

6. Nike Company is planning to purchase a new machine for P500,000. The new machine is
expected to produce cash flow from operations, before the tax, of P135,000 a year in each
of the next five years. Depreciation of P100,000 a year will be charged to income for each of
the next five years. Assume that the income tax rate is 40%. The payback period would be
approximately

A. 3.4 years B. 3.7 years C. 4.1 years D.

7. Plex Inc. is considering the purchased of a P40,000 machine which will be depreciated on a
straight-line basis over an eight-year period with no salvage value. The machine is expected
to generate cash income before income tax of P12,000 a year. Assume that the tax rate
50%. What is the accounting rate of return on the initial increase in required investment?

A. 8.75% B. 17.50% C. 23.75% D.

8. Knicks Company invested in a two-year project having an internal rate of return of 12%. The
project is expected to produce cash flow from operations, net of income tax, of P60,000 in
the first year and P70,000 in the second year. The present value of P1 for one period at 12%
is 0.893 and for two periods at 12% is 0.797. How much will the project cost?
A. P103,610 B. P109,370 C. P116,090 D.

9. A planned factory expansion project has an estimated initial cost of P800,000. Using a
discount rate 20%, the present value of future cost savings from expansion is P843,000. To
yield exactly a 20% time-adjustment rate of return, the actual investment cost cannot
exceed the P800,000 estimate by more than

A. P43,000 B. P20,000 C. P1,075 D.

10. Troy Corporation is planning to invest P80,000 in a three-year project, Troy’s expected rate
of return is 10%. the present value of P1 at 10% for one year is .909, for two years is .826,
and for three years is .751. The cash flow, net of income tax, will be P30,000for the first year
(present value of P27,270) and P36,000 for the second year (present value of P29,736).
Assuming the rate of return is exactly 10% , what will the cash flow ,net of income tax ,be
for the third year?

A. P22,000 B. P22,994 C. P30,618 D.