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Answer: B
. Answer: D
. Answer: A
Additional depreciation can be easily calculated by subtracting the book value of the old machine from the
cost of new machine and then the difference divided by the useful life (160,000 100,000) 4 = 15,000.
10. Answer: B
. Answer: B
3 90,000 90,000 - 0
. Answer: D
. Answer: A
The useful life of the project can be calculated by using the computational pattern for Accounting Rate of
Return:
CFAT 20,000
. Answer: B
ARR: 10.5%
The problem asked for the average accounting rate of return for the first year of assets life.
. Answer: D
The average (accounting) rate of return is determined by dividing the annual after-tax net income by the
average cost of the investment, (beginning book value + ending book value)/2.
. Answer: A
. Answer: A
.22 X = 66,000
X = 300,000
. Answer: D
ATCF 77,000
. Answer: B
. Answer: B
. Answer: D
. Answer: D
. Answer: B
Payback Period: At the end of 4 periods, the initial outflows are fully recovered.
Note to the CPA Candidates: A modified question for this problem is to compute the Present Value of the net
advantage of using sum-of-the-years digits of depreciation instead of straight-line method.
. Answer: C
Period 0 (99,300)
. Answer: C
. Answer: C
There are two cash flows at time zero: P120,000 outflow and P14,000 inflow.
Net cash outflow (120,000 14,000) = 106,000
. Answer: C
CFAT 88,750
Total 517,606
Investment 500,000
The problem assumed that the salvage value is ignored in the computation of annual depreciation so that the
annual cash flows will be greater. The problem did not include among the choices the assumption that salvage
value will be deducted from the cost in computing the amount of annual depreciation.
. Answer: B
ATCF 257,120
Investment 1,000,000
The manner of financing the project is not considered in the analysis of capital investment. Investment must
be separate from financing. It is a normally committed error in the application of capital budgeting
techniques where financing strategy is considered. The explicit or implicit cost of financing the project is
taken care of the discounting process.
. Answer: A
Note: Because the constant growth rate and the discount rate are both 10%, the present value for each period
is constant.
. Answer: B
Total 203,436
Investment 175,000
. Answer: B
Investment 207,200
. Answer: B
. Answer: B
. Answer: B
Total P494,562
Total P432,891
. Answer: B
The purpose of profitability index is to compare two projects profitability by reducing the present value per 1
peso of investment. Therefore, the ratio of 4.35526 @ 10% to 4.11141 @ 12% indicated the profitability index.
. Answer: B
. Answer: D
The net present value of ZERO is 14% and 16%. For better time management, the candidate is expected not
to do detailed calculation of finding out the exact rate.
. Answer: B
The payback period that corresponds to the projects internal rate of return of 12 percent is 4.968. Therefore,
the amount of investment must equal the product of the payback period and the net cash flows:
. Answer: D
. Answer: C
. Answer: A
Depreciation 300,000
. Answer: B
Alternative Solution:
Cash inflow before tax based on present price: (20,000 x 40) 200,000 600,000
Investment 1,500,000
. Answer: C
. Answer: A
1,750 = 0.1753CF
CF = 9,980
. Answer: A
Investment 120,000
. Answer: B
Difference 23,895
. Answer: A
. Answer: B
The net present value = PV of excess salvage value less PV of decrease in after-tax cash flow
7,003 = 0.2790476X
X = 25,096
. Answer: B
. Answer: B
To be acceptable, the project should yield a net present value of zero. The negative net present value must be
offset by the present value of annual intangible benefits.
. Answer: A
The indifference rate (crossover or fisher rate) refers to the rate at which the net present values of the 2
alternatives are indifferent or equal.
The easier test of the rate is to look for IRR (using trial and error technique) of the investment difference.
Difference NIL
Alternative Solution:
Project X Project Y
PV of after-tax cash flows
(12,000 1.1264)6 48,455
(15,200 1.1264)10 83,680
Investment 48,000 83,225
Net Present Value 455 455
. Answer: B
The determination of the indifference point, which is 10%, for the two projects can be made through the use of
trial and error estimation.
Machine 1 Machine 2
PV of Difference in ATCF
. Answer: C
15% Discount Rate
Machine 1 Machine 2
PV of Difference in ATCF
8% Discount Rate
Machine 1 Machine 2
PV of Difference in ATCF
. Answer: C
Cost of Investment:
. Answer: B
Total P1,274,743
. Answer: A
. Answer: A
. Answer: C
. Answer: A
. Answer: A
Accounting rate of return or unadjusted rate of return computes the profitability of the project in term of
accrual profit. Net profit under accrual method considers depreciation, a substantial amount that understates
the average profit. This understatement of amount that is used in the computation necessarily requires that
preferably, average investment should be used, instead of the initial investment, in the determination of
accounting rate of return.
. Answer: B
Cash Flow PV Factor PV of annual net cash flows:
180,000 0.909 163,620
120,000 0.826 99,120
100,000 0.751 75,100
90,000 0.683 61,470
90,000 0.621 55,890
Total 455,200
Amount of investment 400,000
Net Present Value 55,200
. Answer: C
The present value index computes net present value in terms of P1 investment. Therefore, the index of 1.14
means the net present value per P1 of investment is P0.14. This concept makes the present value index better
than the net present value technique because the index indicates which one is the most profitable on a per P1
investment.
. Answer: D
The analyst should be careful in computing the payback period when the project has uneven cash inflows. The
common error in handling uneven cash flows is using the average cash flows instead of reducing the
unrecovered outflows.
. Answer: D
. Answer: D
Investment 300,000
. Answer: B
. Answer: B
The payback for PA is 4.225. This is closest to the present value of annuity of 1 discounted at 11 percent for 6
periods which is 4.231.
. Answer: A
. Answer: C
A quicker calculation of after tax cash flow can be made by adding the tax shield to after-tax cash inflow
without any tax benefit on depreciation.
. Answer: B
. Answer: C
Total 51,756
Investment 50,000
. Answer: C
At the discount rate of 8 percent, there is a net present value of P1,756. Therefore, the IRR is higher than 8
percent.
Using trial and error approach, the first try should use 9 percent. If the present value of the inflows exceeds
P50,000, then the IRR is lower than 9 percent, otherwise it should be 9.5 percent.
Using 9.0 percent in discounting the inflows, there is a net present value of P(174); therefore the IRR is slightly
lower than but very close to 9.0 percent.
. Answer: B
Rent 18,000
Salaries 54,000
Utilities 13,200
. Answer: B
Total 145,000
Rent 48,000
Salaries 17,000
Utilities 5,400
. Answer: A
. Answer: B
. Answer: A
Total 118,000
Total 213,578
Investment 294,000
. Answer: D
The annual cost of advertising can be easily calculated by dividing the net present value of alternative 2, at
16% by the present value of annuity of 1.
. Answer: A
Fixed expenses
Advertising 40,000
Salaries 110,000
Utilities 5,200
. Answer: A
. Answer: A
. Answer: B
Savings 56,250
Less Depreciation 234000 13 years 18,000
Annual income 38,250
Simple Annual Return 38,250 225,000 17 %
. Answer: C
. Answer: A
. Answer: C
Total 2,560,000
. Answer: C
Cost to make:
Decrease in directs labor and variable costs 80,000 x 1.60 (128,000) 664,000
. Answer: A
PV of annual depreciation
. Answer: C
. Answer: C
Investment (2528,500)
Net present value 147,522
. Answer: A
. Answer: A
Freight 11,000
Total 960,000
. Answer: B
Total 5,465,000
Total P20.00
. Answer: A
Total P308,920
. Answer: C
Purchase Cost
Year ATCF
Total 4,243,500
. Answer: A
. Answer: D