Ignore income taxes. The present value of the salvage value is (rounded)
a. $2,424 c. $3,114
b. $2,869 d. $3,224
23
. Ignore income taxes. The present value of the annual net cash inflows from operations is (rounded)
a. $68,411 c. $102,442
b. $76,269 d. $109,296
Comprehensive
Questions 7 through 9 are based on the following information. CMA 1295 4-3 to 5
The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000, it
will cost $6,000 to transport to Moore’s plant and $9,000 to install. It is estimated that the machine will last 10 years, and
it is expected to have an estimated salvage value of $5,000. Over its 10-year life, the machine is expected to produce
2,000 units per year with a selling price of $500 and combined materials and labor costs of $450 per unit. Federal tax
regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated
salvage value. Moore has a marginal tax rate of 40%
24
. What is the net cash outflow at the beginning of the first year that Moore Corporation should use in a capital
budgeting analysis?
a. $(85,000) c. $(96,000)
b. $(90,000) e. $(105,000)
25
. What is the net cash flow for the third year that Moore Corporation should use in a capital budgeting analysis?
a. $68,400 c. $64,200
b. $68,000 d. $79,000
26
. What is the net cash flow for the tenth year of the project that Moore Corporation should use in a capital budgeting
analysis?
a. $100,000 c. $68,400
b. $81,000 d. $63,000
Questions 10 through 13 are based on the following information. Gleim
The Dickins Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the
machine to Dickins’ plant will cost an additional $18,000. It has a 10-year life and is expected to have a salvage value of
$10,000. Furthermore, the machine is expected to produce 4,000 units per year with a selling price of $500 and
combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this type to
be depreciated using the straight-line method over 5 years with no estimated salvage value. Dickins has a marginal tax
rate of 40%.
27
. What is the net cash outflow at the beginning of the first year that Dickens should use in a capital budgeting
analysis?
a. $(170,000) c. $(192,000)
b. $(180,000) d. $(210,000)
28
. What is the net cash flow for the third year that Dickins Corporation should use in a capital budgeting analysis?
a. $136,800 c. $128,400
b. $136,000 d. $107,400
29
. What is the net cash flow for the tenth year of the project that Dickins should use in a capital budgeting analysis?
a. $200,000 c. $136,800
b. $158,000 d. $126,000
30
. What is the approximate payback period on the new machine?
a. 1.05 years. c. 1.33 years
b. 1.54 years d. 2.22 years
ACCOUNTING RATE OF RETURN
Numerator
31
. Lin Co. is buying machinery it expects will increase average annual operating income by $40,000. The initial
increase in the required investment is $60,000, and the average increase in required investment is $30,000. To
compute the accrual accounting rate of return, what amount should be used as the numerator in the ratio? (E)
a. $20,000 c. $40,000
b. $30,000 d. $60,000
ARR on Net Initial Investment
Cash Flows Given, Ignore Income Tax
- An investment opportunity costing $150,000 is expected to yield net cash flows of $45,000 annually for five years.
The cost of capital is 10%. The book rate of return would be (M)
a. 10%. c. 30%.
b. 20%. d. 33.3%. L & H 10e - An investment opportunity costing $80,000 is expected to yield net cash flows of $25,000 annually for four years.
The cost of capital is 10%. The book rate of return would be (M)
a. 10.0%. c. 21.3%.
b. 12.5%. d. 32.0%. L & H 10e
*. The Habagat Inc. is planning to spend P600,000 for a machine that it will depreciate on a straight-line basis over a
ten-year period with no terminal disposal price. The machine will generate cash flow from operations of P120,000 a
year. Ignoring income taxes, what is the accounting rate of return on the net initial investment? (M)
a. 5% c. 10%
b. 12% d. 15% RPCPA 0595
32
. A project requires an investment of $80,000 in equipment. Annual cash inflows of $16,000 are expected to occur for
the next 8 years. No salvage value is expected. The company uses the straight-line method of depreciation with no
mid-year convention. Ignore income taxes.
The accounting rate of return on original investment for the project is (M)
a. 6.25% c. 16.00%
b. 7.50% d. 20.00% H & M
*. Doro Co. is considering the purchase of a $100,000 machine that is expected to result in a decrease of $25,000 per
year in cash expenses after taxes. This machine, which has no residual value, has an estimated useful life of 10
years and will be depreciated on a straight-line basis. For this machine, the accounting rate of return based on the
initial investment will be (M)
a. 10% c. 25%
b. 15% d. 35% AICPA 1189 II-40 - (Ignore income taxes in this problem.) The Jason Company is considering the purchase of a machine that will
increase revenues by $32,000 each year. Cash outflows for operating this machine will be $6,000 each year. The
cost of the machine is $65,000. It is expected to have a useful life of five years with no salvage value. For this
machine, the simple rate of return is: (E)
a. 20%. c. 49.2%.
b. 40%. d. 9.2%. G & N 9e
Old Machine has Scrap Value, Net Cost Savings, Ignore Income Tax - (Ignore income taxes in this problem.) Denny Corporation is considering replacing a technologically obsolete
machine with a new state-of-the-art numerically controlled machine. The new machine would cost $450,000 and
would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine
would cost $20,000 per year to operate and maintain, but would save $100,000 per year in labor and other costs.
The old machine can be sold now for scrap for $50,000. The simple rate of return on the new machine is closest to:
(M)
a. 8.75%. c. 7.78%.
b. 20.00%. d. 22.22%. G & N 9e
After-tax Cash Flow Given
*. Benny Company is planning to purchase a new machine for P600,000. The new machine will be depreciated on the
straight-line basis over 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 taxes, 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 (D)
a. 16.7% c. 8.3%
b. 12.0% d. 25.0% RPCPA 0598
33
. Hooker Oak Furniture Company is considering the purchase of wood cutting equipment. Data on the equipment are
as follows:
Original investment $30,000
Net annual cash inflow $12,000
Expected economic life in years 5
Salvage value at the end of five years $3,000
The company uses the straight-line method of depreciation with no mid-year convention.
What is the accounting rate of return on original investment rounded off to the nearest percent, assuming no taxes
are paid? (D)
a. 40.0% d. 24.0%
b. 72.7% e. 22.0%
c. 20.0% H & M
ARR on Average Investment
Cash Flows Given, Ignore Income Tax - Microsoft Co. is considering the purchase of a $100,000 machine that is expected to result in a decrease of $15,000
per year in cash expenses. This machine, which has no residual value, has an estimated useful life of 10 years and
will be depreciated on a straight-line basis. For this machine, the accounting rate of return would be (M)
a. 10 percent. c. 30 percent.
b. 15 percent. d. 35 percent. Barfield - Mat Company is negotiating to purchase equipment that would cost P200,000 with the expectation that P40,000 per
year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is
10 years, with no salvage value, and would be depreciated by the straight-line method. Mat’s minimum desired rate
of return is 12%. Present value of an annuity of 1 at 12% for 10 periods is 5.65. Present value of 1 due in 10
periods at 12% is 0.322.
The average accrual accounting rate of return during the first year of asset’s use is
A. 20.0% C. 10.0%
B. 10.5% D. 40.0% Pol Bobadilla
Required Investment
ARR based on Initial Investment Given
34
. The Mutya ng Pasig Company, a calendar company, purchased a new machine for P280,000
on January 1. Depreciation for tax purposes will be P35,000 annually for eight years. The
accounting (book value) rate of return (ARR) is expected to be 20% on the initial increase in
required investment. On the assumption of a uniform cash inflow, this investment is expected to
provide annual cash flow from operations, before 30 percent income taxes, of (M)
A. P80,000 C. P115,000
B. P91,000 D. P175,000 Pol Bobadilla
ARR based on Average Investment Given
35
. The Zambales Co. is planning to purchase a new machine which it will depreciate for book purposes, on a straightline 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 product cash flow from operations, net of income taxes, of P175,000 a
year in each of the next ten years. The accounting (book value) rate of return on the average investment is
expected to be 15%. How much will the new machine cost? (M)
A. P1,000,000 C. P1,666,667
B. P700,000 D. P1,800,000 Pol Bobadilla
Required Life - The IRV Company has made an investment in video and recording equipment that costs P106,700. The equipment
is expected to generate cash inflows of P20,000 per year. How many years will the equipment have to be used to
provide the company with a 10% average accounting rate of return on its investment?
A. 7.28 years C. 5.55 years
B. 9.05 years D. 4.75 years. Pol Bobadilla
Sensitivity Analysis
*. Lyben Inc. is planning to produce a new product. To do this, it is necessary to acquire a new equipment that will
cost the company P100,000. The estimated life of the new equipment is five years with no salvage value. The
estimated income and costs based on expected sales of P10,000 units per year are:
Sales @ P10.00 per unit P100,000
Costs @ P8.00 per unit 80,000
Net income P 20,000
The accounting rate of return based on initial investment is 20%
What will be the accounting rate of return based on initial investment of P100,000 if management decrease its
selling price of the new product by 10%? (M)
a. 5% c. 15%
b. 10% d. 20% RPCPA 1077
PAYBACK PERIOD
Initial Investment
*. APJ, Inc. is planning to purchase a new machine that will take six years to recover the cost. The new machine is
expected to produce cash flow from operations, net of income taxes, of P4,500 a year for the first three years of the
payback period and P3,500 a year of the last three years of the payback period. Depreciation of P3,000 a year shall
be charged to income of the six years of the payback period. How much shall the machine cost? (M)
a. P12,000 c. P24,000
b. P18,000 d. none of these RPCPA 1087 - Louis recently invested in a project that has an expected annual cash inflow of $7,000 for 10 years, and an expected
payback period of 3.6 years. How much did Louis invest in the project?
a. $19,444 c. $25,200
b. $36,000 d. $40,000 Barfield
Minimum Annual Before-tax Operating Cash Savings
36
. Whatney Company is considering the acquisition of a new, more efficient press. The cost of the press is $360,000,
and the press has an estimated 6-year life with zero salvage value. Whatney uses straight-line depreciation for both
financial reporting and income tax reporting purposes and has a 40% corporate income tax rate. In evaluating
equipment acquisition of this type, Whatney uses a goal of a 4-year payback period. To meet Whatney’s desired
payback period, the press must produce a minimum annual before-tax operating cash savings of (M)
a. $90,000 c. $114,000
b. $110,000 d. $150,000 CMA 1296 4-13
37
. Jasper Company has a payback goal of 3 years on new equipment acquisitions. A new sorter is being evaluated
that costs $450,000 and has a 5-year life. Straight-line depreciation will be used; no salvage is anticipated. Jasper
is subject to a 40% income tax rate. To meet the company’s payback goal. The sorter must generate reductions in
annual cash operating costs of (M)
a. $60,000 c. $150,000
b. $100,000 d. $190,000 CMA 0693 4-30
Given Net Income, Ignore Income Tax - (Ignore income taxes in this problem.) Jarvey Company is studying a project that would have a ten-year life and
would require a $450,000 investment in equipment that has no salvage value. The project would provide net income
each year as follows for the life of the project:
Sales $500,000
Less cash variable expenses 200,000
Contribution margin 300,000
Less fixed expenses:
Fixed cash expenses $150,000
Depreciation expenses 45,000 195,000
Net income $105,000
The company’s required rate of return is 12%. What is the payback period for this project? (E)
a. 3 years c. 4.28 years
b. 2 years d. 9 years G & N 9e - The Silverbowl Company is considering the purchase of electronic pinball machines to place in 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. Based on 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
Operating Income 40,000
Ignoring the effect of income taxes, the payback period for the pinball machines would be (M)
A. 3.73 years. C. 4.0 years.
B. 3.23 years. D. 7.5 years. Pol Bobadilla
Given Cash Flow, Ignore Income Tax
Even Cash Flows - An investment opportunity costing $85,000 is expected to yield net cash flows of $22,000 annually for five years.
The payback period of the investment is (E)
a. 0.26 years. c. $63,000.
b. 3.86 years. d. All of the above. D, L & H 9e - An investment opportunity costing $55,000 is expected to yield net cash flows of $22,000 annually for five years.
The payback period of the investment is
a. 0.4 years. c. $33,000.
b. 2.5 years. d. some other number. L & H 10e - An investment opportunity costing $200,000 is expected to yield net cash flow of $44,000 annually for seven years.
The payback period of the investment is (E)
a. 0.22 years. c. 4.55 years.
b. 3.08 years. d. Some other number. D, L & H 9e - An investment opportunity costing $100,000 is expected to yield net cash flows of $22,000 annually for seven years.
The payback period of the investment is (E)
a. 0.22 years. c. 4.55 years.
b. 3.08 years. d. some other number. L & H 10e
38
. The net initial investment for a piece of construction equipment is $1,000,000. Annual cash inflows are expected to
increase by $200,000 per year. The equipment has an 8-year useful life. What is the payback period? (E)
a. 8.00 years c. 6.00 years
b. 7.00 years d. 5.00 years Horngren - A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for
five years. The payback period of the project is (E)
A. 1.5 years. C. 3.3 years.
B. 2 years. D. 4 years. Gitman
*. Assuming that capital requirement for new machinery is P135,000; net sale of present equipment – P35,000;
average annual operating cash flow – P25,000. The payback period would be: (E)
a. 4 years c. 5.4 years
b. 4.5 years d. 6.8 years RPCPA 1078 - (Ignore income taxes in this problem.) A company with $800,000 in operating assets is considering the purchase of
a machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year. The payback
period for this machine in years is closest to: (E)
a. 0.27 years. c. 3.75 years.
b. 10.7 years. d. 40 years. G & N 9e
39
. An investment project is expected to yield $10,000 in annual revenues, will incur $2,000 in fixed costs per year, and
requires an initial investment of $5,000. Given a cost of goods sold of 60% of sales and ignoring taxes, what is the
payback period in years? (M)
a. 2.50 c. 2.00
b. 5.00 d. 1.25 CIA 0586 IV-25 - (Ignore income taxes in this problem.) The Higgins Company has just purchased a piece of equipment at a cost of
$120,000. This equipment will reduce operating costs by $40,000 each year for the next eight years. This equipment
replaces old equipment that was sold for $8,000 cash. The new equipment has a payback period of: (E)
a. 8.0 years. c. 10.0 years.
b. 2.8 years. d. 3.0 years. G & N 9e
40
. Haig Aircraft is considering a project which has an up-front cost paid today at t = 0. The project will generate positive
cash flows of $60,000 a year at the end of each of the next five years. The project’s NPV is $75,000 and the
company’s WACC is 10 percent. What is the project’s simple, regular payback? (M)
a. 3.22 years d. 2.35 years
b. 1.56 years e. 4.16 years
c. 2.54 years Brigham
41
. Deming, Inc. is considering the purchase of production equipment that costs $600,000. The equipment is expected
to generate annual cash inflows of $200,000 and have a useful life of 5 years with no salvage value. The firm’s cost
of capital is 14 percent. The company uses the straight-line method of depreciation with no mid-year convention.
Ignore income taxes.
Payback for the project is
a. 5.00 years c. 3.00 years
b. 3.50 years d. 2.38 years H & M - (Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions.
The auto was purchased for $9,000 and will have a 6-year useful life and a $3,000 salvage value. Delivering
prescriptions (which the pharmacy has never done before) should increase gross revenues by at least $5,000 per
year. The cost of these prescriptions to the pharmacy will be about $2,000 per year. The pharmacy depreciates all
assets using the straight-line method. The payback period for the auto is: (E)
a. 3.0 years. c. 2.0 years.
b. 1.8 years. d. 1.2 years. G & N 9e - Bryant 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 new machine P40,000
Net annual savings in operating costs 9,000
Salvage value now of the old machine 6,000
Salvage value of the old machine in 8 years 0
Salvage value of the new machine in 8 years 5,000
Estimated life of the new machine 8 years
What is the expected payback period for the new machine? (M)
A. 4.44 years. C. 6.50 years.
B. 2.67 years. D. 3.78 years. Pol Bobadilla - Salve Company 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 P100,000
Net annual savings in operating costs 20,000
Salvage value now of the old machine 10,000
Salvage value of the old machine in 8 years 0
Salvage value of the new machine in 8 years 20,000
Estimated life of the new machine 8 years
What is the expected payback period for the new machine?
a. 4.00 years c. 4.50 years
b. 4.33 years d. 5.00 years Pol Bobadilla
Uneven Cash Flows
42
. If an initial investment outlay is $60,000 and the cash flows projected are $15,000, $20,000, $25,000, and $10,000
in each of the first four years, respectively, the payback period in years would be: (E)
A. 3.3 D. 4.0
B. 3.0 E. 5.0
C. 2.5 C & U - A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1,
$20,000 in year 2, and $10,000 in year 3. The payback period of the project is (E)
A. 1 year. C. between 1 and 2 years.
B. 2 years. D. between 2 and 3 years. Gitman
43
. The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000
per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will
cost the firm $150,000 today, and the firm’s cost of capital is 10 percent. Assume cash flows occur evenly during the
year, 1/365th each day. What is the payback period for this investment? (E)
a. 5.23 years d. 6.12 years
b. 4.86 years e. 4.35 years
c. 4.00 years Brigham
44
. Michigan Mattress Company is considering the purchase of land and the construction of a new plant. The land,
which would be bought immediately (at t = 0), has a cost of $100,000 and the building, which would be erected at
the end of the first year (t = 1), would cost $500,000. It is estimated that the firm’s after-tax cash flow will be
increased by $100,000 starting at the end of the second year, and that this incremental flow would increase at a 10
percent rate annually over the next 10 years. What is the approximate payback period? (M)
a. 2 years d. 8 years
b. 4 years e. 10 years
c. 6 years Brigham
45
. A machine costing $1,000 produces total cash inflows of $1,400 over 4 years. Determine the payback period given
the following cash flows: (E)
Year After-Tax Cash Flows Cumulative Cash Flows
1 $400 $ 400
2 300 700
3 500 1,200
4 200 1,400
a. 2 years. c. 2.86 years.
b. 2.60 years. d. 3 years. CIA 1187 IV-19
*. Given these data:
Net after tax inflows are: P24,000 for year 1, P30,000 for year 2, P36,000 for year 3, and P30,00 for
year 4.
Initial investment outlay is P60,000.
Cost of capital is 18%
Determine the payback period for this investment (E)
a. 2.50 years. c. 3.00 years.
b. 2.17 years. d. 3.17 years. RPCPA 0594 - (Ignore income taxes in this problem.) The Keego Company is planning a $200,000 equipment investment that has
an estimated five-year life with no estimated salvage value. The company has projected the following annual cash
flows for the investment.
Year Cash Inflows
1 $120,000
2 60,000
3 40,000
4 40,000
5 40,000
Total $300,000
Assuming that the cash inflows occur evenly over the year, the payback period for the investment is: (E)
a. 0.75 years. c. 4.91 years.
b. 1.67 years. d. 2.50 years. CMA adapted
*. Sweets, Etc., Inc. plans to undertake a capital expenditure requiring P2 million cash outlay. Below are the projected
after-tax cash inflow for the five year period covering the useful life. The company’s tax rate is 35%.
Year P’000
1 600
2 700
3 480
4 400
5 400
The founder and president of the candy company believes that the best gauge for capital expenditure is cash
payback period and that the recovery period should not be more than 75% of the useful life of the project or the
asset. Should the company undertake the project? (M)
a. No, since the payback period is 4 years or 80% of the useful life of the project.
b. Yes, since the payback period is 3.55 years or 71% of the useful life of the project.
c. No, since the payback period extends beyond the life of the project. RPCPA 1096
d. Yes, since the payback period is 4 years and still shorter than the useful life of the project.
46
. Monck Management Services is considering an investment of $30,000. Data related to the investment are as
follows:
Year Cash Inflows
1 $10,000
2 12,000
3 15,000
4 20,000
5 10,000
Cost of capital is 18 percent.
What is the payback period in years approximated to two decimal points assuming no taxes are paid?
a. 3.00 d. 2.22
b. 2.00 e. 5.00
c. 2.53 H & M
47
. Handy Products Company was considering the purchase of equipment. Details on the equipment are as follows:
Year Original Investment Cash Inflow from Operations
0 $100,000
1 $20,000
2 20,000
3 30,000
4 20,000
5 30,000
What is the payback period in years, assuming no taxes are paid?
a. 4.00 d. 3.85
b. 4.33 e. 3.33
c. 5.00 H & M
*. A company has two projects – Project Zoom and Project Oz. The table below shows the projected cash flows for
the first five years of the project.
Project Zoom Project Oz
Year 0 -10,000 -15,000
Year 1 +4,000 +7,600
Year 2 +2,000 +3,500
Year 3 +1,500 +3,900
Year 4 +2,500 +2,000
Year 5 +3,000 +1,000
Given the data above, compute the number of years within which the company may be able to recoup back its
investments from both projects:
a. 4 years; 3 years c. 5 years, 3 years
b. 4 years; 5 years d. 5 years, 5 years RPCPA 1091
48
. For $45,000, Harmon Company purchased a new machine with an estimated useful life of five years with no salvage
value. The machine is expected to produce cash flow from operations, net of income taxes, as follows:
1st year $ 9,000
2d year 12,000
3d year 15,000
4th year 9,000
5th year 8,000
Harmon will use the sum-of-the-years-digits’ method to depreciate the new machine as follows:
1st year $15,000
2d year 12,000
3d year 9,000
4th year 6,000
5th year 3,000
What is the payback period? (E
A. 3 years C. 5 years
B. 4 years D. 2 years AICPA adapted
Given Before Tax Cash Flow
Even Cash Flows
*. Mary Company recently acquired a machine at a cost of P64,000. It will be depreciated on a straight-line basis over
eight years with no estimated salvage value. Mary estimates that this will produce an annual net cash inflow (before
income taxes) of P18,000. Assuming an income tax rate of 35%, what is the approximate payback period for this
investment? (E)
a. 4.4 years. c. 7.1 years.
b. 12.8 years. d. 3.6 years. RPCPA 0598
49
. Fitzgerald Company is planning to acquire a $250,000 machine that will provide increased efficiencies, thereby
reducing annual operating costs by $80,000. The machine will be depreciated by the straight-line method over a 5-
year life with no salvage value at the end of 5 years. Assuming a 40% income tax rate, the machine’s payback
period is (E)
A. 3.13 years. C. 3.68 years.
B. 3.21 years. D. 4.81 years. CMA 0691 4-16
50
. Jordan Company is considering the purchase of a new machine for $200,000. The machine generates annual
revenues of $125,000 and annual expenses of $75,000 which includes $15,000 of depreciation. What is the
payback period in years on the machine approximated to one decimal point?
a. 1.6 d. 1.7
b. 3.1 e. 2.1
c. 4.0 H & M
Payback Reciprocal
*. The payback reciprocal is an estimate of the internal rate of return. The Bravo, Inc. is considering the acquisition of
a merchandise picking system to improve customer service. Annual cash returns on investment cost of P1.2 million
is P220,000. Useful life is estimated at 8 years. The company’s cost of capital is 14% and income tax rate is 35%.
Calculate Bravo, Inc.’s payback reciprocal for this investment: (E)
a. 20.5% c. 11.9%
b. 18.3% d. 22.2% RPCPA 0594
Payback & Payback Reciprocal
Questions 48 and 49 are based on the following information. RPCPA 0591
If a machine costs P5,000 and will generate annual cash inflows of P1,000 for the next 8 years,
*. What is the payback period?
a. 8 years c. 6 years
b. 5 years d. 3 years
*. What is the payback reciprocal? (E)
a. 125% c. 20%
b. 15% d. 33%
Questions 71 through 73 are based on the following information. Gleim
Henderson Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks have a useful life of 8 years
and cost a total of $500,000. Henderson expects its next increase in after-tax cash flow to be $150,000 in Year 1,
$175,000 in Year 2, $125,000 in Year 3, and $100,000 in each of the remaining years.
51
. Ignoring the time value of money, how long will it take Henderson to recover the amount of investment.
a. 3.5 years. c. 4.2 years.
b. 4.0 years. d. 5 years.
52
. What is the payback reciprocal for the fleet of trucks?
a. 29% c. 24%
b. 25% d. 20%
53
. Assume the net cash flow to be $130,000 a year. What is the payback time for the fleet of trucks?
a. 3 years. c. 3.85 years.
b. 3.15 years. d. 4 years.
BAILOUT PAYBACK - The manufacture of folic acid is a competitive business. A new plant costs $100,000 and lasts for three years. The
cash flow from the plant is as follows: Year 1: +43,300, Year 2: $43,300 and Year 3 = 58,300. If the salvage value of
the plant at the end of year 1 is $80,000, would you scrap the plant at the end of year 1? Assume there is no tax.
A. Yes C. Need more information
B. No D. Don’t know B & M - The manufacture of folic acid is a competitive business. A new plant costs $100,000 and lasts for three years. The
cash flow from the plant is as follows: Year 1: +43,300, Year 2: $43,300 and Year 3 = 58,300. If the salvage value of
the plant at the end of year 2 is $60,000, would you scrap the plant at the end of year 2? Assume there is no tax.
A. Yes C. Don’t know
B. No D. Need more information B & M - The manufacture of folic acid is a competitive business. A new plant costs $100,000 and lasts for three years. The
cash flow from the plant is as follows: Year 1: +43,300, Year 2: $43,300 and Year 3 = 58,300. If the salvage value of
the plant at the end of year 2 is $40,000, would you scrap the plant at the end of year 2? Assume there is no tax.
A. Yes C. Don’t know
B. No D. Need more information B & M
54
. Womark Company purchased a new machine on January 1 of this year for $90,000, with an estimated useful life of
5 years and a salvage value of $10,000. The machine will be depreciated using the straight-line method. The
machine is expected to produce cash flow from operations, net of income taxes, of $36,000 a year in each of the
next 5 years. The new machine’s salvage value is $20,000 in years 1 and 2, and $15,0000 in years 3 and 4. What
will be the bailout period (rounded) for the new machine? (E)
a. 1.4 years. c. 1.9 years.
b. 2.2 years. d. 3.4 years. AICPA 0582 I-36
DISCOUNTED PAYBACK
Even Cash Flow
55
. Coughlin Motors is considering a project with the following expected cash flows:
Year Project Cash Flow
0 -$700 million
1 200 million
2 370 million
3 225 million
4 700 million
The project’s WACC is 10 percent. What is the project’s discounted payback? (M)
a. 3.15 years d. 2.58 years
b. 4.09 years e. 3.09 years Brigham
c. 1.62 years
Uneven Cash Flow - Given the following cash flows for project Z: C0
= -2,000, C1
= 600, C2
= 2160 and C3
= 6000, calculate the
discounted payback period for the project at a discount rate of 20%. (E)
A. One year C. 3 years
B. 2 years D. None of the above B & M
56
. A project has the following cash flows:
Year Project Cash Flow
0 -$3,000
1 1,000
2 1,000
3 1,000
4 1,000
Its cost of capital is 10 percent. What is the project’s discounted payback period? (E)
a. 3.00 years d. 3.75 years
b. 3.30 years e. 4.75 years
c. 3.52 years Brigham
57
. Lloyd Enterprises has a project which has the following cash flows:
Year Project Cash Flow
0 -$200,000
1 50,000
2 100,000
3 150,000
4 40,000
5 25,000
The cost of capital is 10 percent. What is the project’s discounted payback? (M)
a. 1.8763 years d. 2.4793 years
b. 2.0000 years e. 2.6380 years
c. 2.3333 years Brigham
58
. Polk Products is considering an investment project with the following cash flows:
Year Project Cash Flow
0 -$100,000
1 40,000
2 90,000
3 30,000
4 60,000
The company has a 10 percent cost of capital. What is the project’s discounted payback? (M)
a. 1.67 years d. 2.49 years
b. 1.86 years e. 2.67 years
c. 2.11 years Brigham
59
. Davis Corporation is faced with two independent investment opportun-ities. The corporation has an investment
policy which requires acceptable projects to recover all costs within 3 years. The corporation uses the discounted
payback method to assess potential projects and utilizes a discount rate of 10 percent. The cash flows for the two
projects are:
Year Project A Cash Flow Project B Cash Flow
0 -$100,000 -$80,000
1 40,000 50,000
2 40,000 20,000
3 40,000 30,000
4 30,000 0
Which investment project(s) does the company invest in? (M)
a. Project A only. c. Project A and Project B.
b. Neither Project A nor Project B. d. Project B only. Brigham
NET PRESENT VALUE
Net Initial Investment
Even Cash Inflows Given, Ignore Income Taxes
60
. Shirt Company wants to purchase a new cutting machine for its sewing plant. The investment is expected to
generate annual cash inflows of $300,000. The required rate of return is 12% and the current machine is expected
to last for four years. What is the maximum dollar amount Shirt Company would be willing to spend for the machine,
assuming its life is also four years? Income taxes are not considered. (M)
a. $507,000 c. $791,740
b. $720,600 d. $911,100 Horngren - (Ignore income taxes in this problem.) Stratford Company purchased a machine with an estimated useful life of
seven years. The machine will generate cash inflows of $90,000 each year over the next seven years. If the
machine has no salvage value at the end of seven years, and assuming the company’s discount rate is 10%, what is
the purchase price of the machine if the net present value of the investment is $170,000? (M)
a. $221,950. c. $268,120.
b. $170,000. d. $438,120. G & N 9e
Even After-tax Cash Flows Given
*. Garwood Company has purchased a machine that will be depreciated on the straight-line basis over an estimated
useful life of 7 years with no salvage value. The machine is expected to generate cash flow from operations, net of
income taxes, of $80,000 in each of the 7 years. Garwood’s expected rate of return is 12%. Information on present
value factors is as follows:
Present value of $1 at 12% for seven periods 0.452
Present value of an ordinary annuity of $1 at 12% for seven periods 4.564
Assuming a positive net present value of $12,720, what was the cost of the machine? (M)
a. $240,400 c. $352,400
b. $253,120 d. $377,840 AICPA 1181 I-39
*. It is the start of the year and St. Tropez Co. plans to replace its old sing-along equipment. These information are
available:
Old New
Equipment cost P70,000 P120,000
Current salvage value 10,000 –
Salvage value, end of useful life 2,000 16,000
Annual operating costs 56,000 38,000
Accumulated depreciation 55,300 –
Estimated useful life 10 years 10 years
The company’s income tax rate is 35% and its cost of capital is 12%. What is the present value of all the relevant
cash flows at time zero? (D)
a. (P54,000) c. (P120,000)
b. (P110,000) d. (P124,700) RPCPA 0594
Uneven Cash Inflows Given, Ignore Income Taxes - (Ignore income taxes in this problem.) Horn Corporation is considering investing in a four-year project. Cash inflows
from the project are expected to be as follows: Year 1, $2,000; Year 2, $2,200; Year 3, $2,400; Year 4, $2,600. If
using a discount rate of 8%, the project has a positive net present value of $500, what was the amount of the
original investment? (M)
a. $1,411. c. $7,054.
b. $2,411. d. $8,054. AICPA adapted
Net Present Value Given
*. McIndon Corporation bought a major equipment which is depreciable over 7 years on a straight-line basis without
any salvage value. It is estimated that it would generate cash flow from operations, net of income taxes, of
P800,000 in each of the seven years. The company’s expected rate of return is 12%. Based on estimates, the
project has a net present value of P127,200. What is the cost of the equipment? (E)
To facilitate computations, below are present value factors:
Present value of P1 at 12% for seven years is 0.452.
Present value of an ordinary annuity of P1 at 12% for seven years is 4.564.
a. P3,651,200 c. P2,404,000
b. P3,524,000 d. P3,778,400 RPCPA 1095
*. On January 1, a company invested in an asset with a useful life of 3 years. The company’s expected rate of return
is 10%. The cash flow and present and future value factors for the 3 years are as follows:
Year
Cash Inflow
From the Asset
Present Value
of $1 at 10%
Future Value
of $1 at 10%
1 $ 8,000 .91 1.10
2 9,000 .83 1.21
3 10,000 .75 1.33
All cash inflows are assumed to occur at year-end. If the asset generates a positive net present value of $2,000,
what was the amount of the original investment?
a. $20,250 c. $30,991
b. $22,250 d. $33,991 CIA 1185 IV-24
Required Salvage Value
105.Cramden Armored Car Co. is considering the acquisition of a new armored truck. The truck is expected to cost
$300,000. The company’s discount rate is 12 percent. The firm has determined that the truck generates a positive
net present value of $17,022. However, the firm is uncertain as to whether it has determined a reasonable estimate
of the salvage value of the truck. In computing the net present value, the company assumed that the truck would be
salvaged at the end of the fifth year for $60,000. What expected salvage value for the truck would cause the
investment to generate a net present value of $0? Ignore taxes. (D)
a. $30,000 c. $55,278
b. $0 d. $42,978 Barfiel
