________1.

The capital budget is a(n) Corporation is considering the replacement of their

computer system. Taking into account the income tax
A. Plan to insure that there are sufficient funds effect and considering the carrying value of the old
available for the operating needs of the company system (CVOS) and the salvage value of the new system
B. Exercise that sets the long range goals of the (SVNS), which combination below applies to the decision
company including the consideration of external making process?
influences
C. Plan that coordinates and communicates a A. CVOS, irrelevant and SVNS, irrelevant
company’s plan for the coming year to all B. CVOS, irrelevant and SVNS, relevant
departments and divisions C. CVOS, relevant and SVNS, irrelevant
D. Plan that assesses the long-term needs of the D. CVOS, relevant and SVNS, relevant
company for plant and equipment purchases
________7. As a capital budgeting technique, the
________2. Capital budgeting techniques are least payback period considers depreciation expense (DE) and
likely to be used in evaluating the time value of money (TVM) as follows:

A. Acquisition of new aircraft by a cargo company A. DE, relevant and TVM, relevant
B. Design and implementation of a major advertising B. DE, irrelevant and TVM, irrelevant
program C. DE, irrelevant and TVM, relevant
C. Adoption of a new method of allocating non- D. DE, relevant and TVM, irrelevant
traceable cost to product lines
D. Sale by a conglomerate of an unprofitable division ________8. Diliman Republic Publishers, Inc. is
considering replacing an old press that cost P800,000 six
________3. In capital expenditure decisions, the years ago with a new one that would cost P2,250,000.
following are relevant in estimating operating costs Shipping and installation would cost and additional
except P200,000. The old press has a book value of P150,000
and could be sold currently for P50,000. The increased
A. Future costs production of the new press would increase inventories
B. Cash costs by P40,000, accounts receivable by P160,000 and
C. Differential costs accounts payable by P140,000. Diliman Republic’s net
D. Historical costs initial investment for analyzing the acquisition of the
new press assuming a 35% income tax rate would be
________4. In capital budgeting decisions, the
following items are considered among others: A. P 2,450,000
B. P 2,425,000
(1) Cash outflow for the investment C. P 2,600,000
(2) Increase in working capital requirements D. P 2,250,000
(3) Profit on sale of old asset
(4) Loss on write-off of old asset ________9. Key Corp. plans to replace a production
machine that was acquired several years ago.
For which of the above items would taxes be relevant? Acquisition cost is P450,000 with salvage value of
P50,000. The machine being considered is worth
A. Items 1 and 3 only P800,000 and the supplier is willing to accept the old
B. Items 3 and 4 only machine at a trade-in value of P60,000. Should the
C. All items company decide not to acquire the new machine, it
D. Items 1, 3 and 4 only needs to repair the old one at a cost of P200,000. Tax
wise, the trade-in transaction will not have any
________5. All of the following are methods that aid implication but the cost to repair is tax-deductible. The
management in analyzing the expected result of capital effective corporate tax rate is 35% of net income subject
budgeting decisions, except to tax. For purposes of capital budgeting, the net
investment in the new machine is
A. Accrual accounting rate of return
B. Payback method A. P 540,000
C. Future value cash flow B. P 610,000
D. Discounted cash flow rate of return C. P 660,000
D. P 800,000

________10. Regal Industries is replacing a grinder

________6. The consulting firm of Magaling purchased 5 years ago for P15,000 with a new one
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costing P25,000 cash. The original grinder is being incremental after tax cash flows from the machine would
depreciated on a straight-line basis over 15 years to a be:
zero salvage value. Regal will sell this old equipment to
a third party for P6,000 cash. The new equipment will be A. P 330,000
depreciated on a straight-line basis over 10 years to a B. P 345,000
zero salvage value. Assuming a 40% marginal tax rate, C. P 295,000
Regal’s net cash investment at the time of purchase if D. P 300,000
the old grinder is sold and the new one is purchased is
________15. Which of the following statements
A. P 19,000 concerning cash flow determination for capital budgeting
B. P 15,000 purposes is not correct?
C. P 17,400
D. P 25,000 A. Tax depreciation must be considered because it
affects cash payment for taxes
________11. Lawson Inc is expanding its manufacturing B. Book depreciation is relevant because it affects net
plant, which requires an investment of P4 million in new income
equipment and plant modifications. Lawson’s sales are C. Net working capital changes should be included in
expected to increase by P3 million per year as a result of cash flow forecasts
the expansion. Cash investments in current assets D. Relevant opportunity costs should be included in
average 30% of sale; accounts payable and other cash flow forecasts
current liabilities are 10% of sales. What is the
estimated total investments for this expansion? ________16. Which one of the following statements
about the payback method of investments analysis is
A. P 3.4 million correct? The payback method
B. P 4.3 million
C. P 4.6 million A. Does not consider the time value of money
D. P 5.2 million B. Considers cash flows after the payback has been
reached
________12. In equipment replacement decisions, C. Uses discounted cash flow techniques
which one of the following does not affect the decisions- D. Is rarely used in practice
making process?
________17. An investment project is expected to yield
A. Current disposal price of the old equipment P10,000 in annual revenues, will incur P2,000 in fixed
B. Operating costs of the old equipment cost per year, and requires an initial inventory of P5,000.
C. Original costs of the new equipment Given a cost of goods sold of 60% of sales and ignoring
D. Operating costs of the new equipment taxes, what is the payback period in years?

________13. A company considers a project that will A. 2.50

generate cash sales of P50,000 per year. Fixed costs will B. 5.00
be P10,000 per year, variable costs will be 40% of sales, C. 2.00
and depreciation of the equipment in the project will be D. 1.25
P5,000 per year. Taxes are 40%. The expected annual
cash flow to the company resulting from the project is ________18. Mary Company recently acquired a
machine at a cost of P64,000. It will be depreciated on a
A. P 15,000 straight-line basis over eight years with no estimated
B. P 9,000 salvage value. Mary estimates that this machine will
C. P 19,000 produce an annual net cash inflow (before income taxes)
D. P 14,000 of P18,000. Assuming an income tax rate of 35%, what
is the approximate payback period on the investment?
________14. Arlene Inc currently has annual cash
revenues of P2,400,000 and annual operating costs of A. 4.4 years
P1,850,000 (all cash items except depreciation of B. 12.8 years
P350,000). The company is considering the purchase of C. 7.1 years
a new machine costing P1,200,000 that would increase D. 3.6 years
cash revenues to P2,900,000 and operating costs
(including depreciation) to P2,050,000. The new ________19. Which of the following is necessary in
machine would increase depreciation to P500,000 per order to calculate the payback period for a project?
year. Revenues are expected to increase to P2,900,000
and assuming a 35% income tax rate, Arlene’s A. Useful life
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B. Minimum desired rate of return ________24. A capital budgeting method that provides
C. Net present value a rough approximation of an investment’s profitability as
D. Annual cash flow measured with net income from the income statement is
known as
________20. The payback reciprocal is an estimate of
the internal rate of return. The Bravo Inc is considering A. Average rate of return method
the acquisition of a merchandise picking system to B. Net present value method
improve customer service. Annual cash returns on C. Payback period method
investment cost of P1.2 million is P220,000. Useful life is D. Internal rate of return method
estimated at 8 years. The company’s cost of capital is
14% and income tax rate is 35%. Calculate Bravo Inc’s ________25. The Hablot Inc is planning to spend
payback reciprocal for this investment P600,000 for a machine that it will depreciate on a
straight-line basis over a ten-year period with no
A. 20.5% terminal disposal price. The machine will generate cash
B. 18.3% flow from operations of P120,000 a year. Ignoring
C. 11.9% income taxes, what is the accounting rate of return on
D. 22.2% the initial investment?

________21. The bailout payback method A. 5%

B. 12%
A. Incorporates the time value of money C. 10%
B. Equals the recovery period from normal operations D. 15%
C. Eliminates the disposal value from the payback
calculation
D. Measures the risk is a project is terminated

________22. Mark Company purchased a new machine

on January 1 of this year for an amount of P90,000 with
an estimated useful life of 5 years and a salvage value of
P10,000. The machine will be depreciated using the
straight-line method. The machine is expected to
produce cash flows from operations, net of income
taxes, of P36,000 a year in each of the next 5 years. The
new machine’s salvage value is P20,000 in years 1 and
2, and P15,000 in years 3 and 4. What will be the
bailout period (rounded) for this new machine?

A. 1.4 years
B. 2.2 years
C. 1.9 years
D. 3.4 years

________23. The following statements refer to the

accounting rate of return (ARR):

(1) The ARR is based on the actual basis, not cash

basis
(2) The ARR does not consider the time value of
money
(3) The profitability of the project is not considered

From the above statements, which at considered

limitations of the ARR concept?

A. Statements 2 and 3 only

B. Statements 3 and 1 only
C. All the 3 statements
D. Statements 1 and 2 only

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