Investment A requires a net investment of $800,000. The required rate of return is 12% for the four-year annuity.

What are the annual cash inflows if the net present value equals 0? (rounded) (M)

a. $189,483 c. $274,848

b. $263,418 d. $ 295,733 Horngren

- Salvage Co. is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its

operation by a considerable margin. The new ship would cost $500,000 and would be fully depreciated by the

straight-line method over 10 years. At the end of 10 years, the ship will have no value and will be sunk in some

already polluted harbor. The Salvage Co.’s cost of capital is 12 percent, and its marginal tax rate is 40 percent. If the

ship produces equal annual labor cost savings over its 10-year life, how much do the annual savings in labor costs

need to be to generate a net present value of $0 on the project? (Round to the nearest dollar.) (M)

a. $68,492 c. $88,492

b. $114,154 d. $147,487 Barfield

NPV is Positive - (Ignore income taxes in this problem.) Benz Company is considering the purchase of a machine that costs $100,000

and has a useful life of 18 years. The company’s required discount rate is 12%. If the machine’s net present value is

$5,850, then the annual cash inflows associated with the machine must be (round to the nearest whole dollar): (M)

a. $42,413.

b. $14,600.

c. $13,760.

d. it is impossible to determine from the data given. G & N 9e - (Ignore income taxes in this problem.) Given the following data:

Present investment required $12,000

Net present value $ 430

Annual cost savings $ ?

Discount rate 12%

Life of the project 10 years

Based on the data given, the annual cost savings would be: (M)

a. $1,630.00. c. $2,123.89.

b. $2,200.00. d. $2,553.89. G & N 9e

NPV is Negative - Highpoint, Inc., is considering investing in automated equipment with a ten-year useful life. Managers at Highpoint

have estimated the cash flows associated with the tangible costs and benefits of automation, but have been unable

to estimate the cash flows associated with the intangible benefits. Using the company’s 10% discount rate, the net

present value of the cash flows associated with just the tangible costs and benefits is a negative $184,350. How

large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable

investment? (M)

a. $18,435. c. $35,000.

b. $30,000. d. $37,236. G & N 9e

Required Life

106.Booker Steel Inc. is considering an investment that would require an initial cash outlay of $400,000 and would have

no salvage value. The project would generate annual cash inflows of $75,000. The firm’s discount rate is 8 percent.

How many years must the annual cash flows be generated for the project to generate a net present value of $0? (M)

a. between 5 and 6 years c. between 7 and 8 years

b. between 6 and 7 years d. between 8 and 9 years Barfield

Present Value Computations

Combined Projects - Consider two projects A and B with present values PV(A. = 300 (discounted at 10%) and PV(B. = 500 (discounted at

15%). The present value of the combined project is:

A. 800 C. 300

B. 500 D. None of the above B & M

Differential Depreciation Tax Shield - For P450,000, Mabini Corporation 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 40% income taxes (as shown

below). Mabini will use the sum-of-the-years’-digits method to depreciate the new machine (as shown below).

After-Tax Cash Flow SYD Depreciation

First year P160,000 P150,000

Second year 140,000 120,000

Third year 180,000 90,000

Fourth year 120,000 60,000

Fifth year 100,000 30,000

The present value of 1 for 5 periods at 12% is 3.60478. The present value of 1 at 12% at end of each period are:

End of Period 1 – 0.8928; Period 2 – 0.79719, Period 3 – 0.71178; Period 4 – 0.63552; Period 5 – 0.56743.

Had Mabini used straight-line method of depreciation, what is the difference in net present value provided by the

machine at a discount rate of 12%?

A. Increase of P9,750 C. Decrease of P24,376

B. Decrease of P9,750 D. Increase of P24,376 Pol Bobadilla - Tristan Consulting, Inc. operates consulting offices in Manila, Olongapo, and Cebu. The firm is presently

considering an investment in a new mainframe computer and communication software. The computer would cost

P6 million and have an expected life of 8 years. For tax purposes, the computer can be depreciated using either

straight-line method or Sum-of-the-Years’-Digits (SYD) method over five years. No salvage value is recognized in

computing depreciation expense and no salvage value is expected at the end of the life of the equipment. The

company’s cost of capital is 10% and its tax rate is 40%.

The present value of an annuity of 1 for 5 periods is 3.791 and for 8 periods is 5.335. The present values of 1 at the

end of each period are:

1 0.9091 5 0.6209

2 0.8264 6 0.5645

3 0.7513 7 0.5132

4 0.6830 8 0.4665

The present value of the net advantage using SYD method of depreciation with a five-year life- instead of straightline method of depreciating the equipment is

A. P86,224 C. P115,168

B. P215,560 D. P287,893 Pol Bobadilla - Silliman Corporation purchased a new machine for P450,000. The new machine has an estimated useful life of five

years with no salvage value. The machine is expected to produce cash flows from operations, net of 40 percent

income taxes, as follows:

First year P160,000

Second year 140,000

Third year 180,000

Fourth year 120,000

Fifth year 100,000

Silliman will use the sum-of-the-years-digits’ method to depreciate the new machine as follows:

First year P150,000

Second year 120,000

Third year 90,000

Fourth year 60,000

Fifth year 30,000

The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12 percent at end of each

period are:

End of: Period 1 – 0.8928, Period 2 – 0.79719, Period 3 – 0.71178, Period 4 – 0.63552, Period 5 – 0.56743

The net advantage (in present value) of using the Sum-of-the-Years’-Digits method over the straight-line method at

a discount rate of 12 percent is

a. P14,620 c. P 7,340

b. P12,188 d. P 9,750 Pol Bobadilla

Uneven Cash Flows - What is the present value of the following cash flow at a discount rate of 15% APR?

t=1 t=2

-100,000 300,000

A. $185,000 C. $139,887

B. $200,000 D. None of the above B & M - USSA company has an opportunity to invest in a gold mine. The initial investment is $150 million. The mine is

estimated to produce 80,000 ounces of gold per year for the next ten years. The extraction cost of gold per ounce is

$100 and the expected revenue is at that level. Suppose the current price of gold is $300 per ounce. The price of

gold is expected to grow at 4% per year for the foreseeable future. If the approximate discount rate is 10%, then

the present value of gold is:

A. Less than $300 per ounce C. Greater than $300 per ounce

B. $300 per ounce D. Not enough information B & M - USSA company has an opportunity to invest in a gold mine. The initial investment is $150 million. The mine is

estimated to produce 80,000 ounces of gold per year for the next ten years. The extraction cost of gold per ounce is

$100 and the expected revenue is at that level. Suppose the current price of gold is $290 per ounce. The price of

gold is expected to grow at 5 % per year for foreseeable future. If the approximated discount rate is 8%, the present

value of gold is:

A. Less than $290 per ounce C. $290 per ounce

B. Greater than $290 per ounce D. None of the above B & M - USSA company has an opportunity to invest in a gold mine. The initial investment is $150 million. The mine is

estimated to produce 80,000 ounces of gold per year for the next ten years. The extraction cost of gold per ounce is

$100 and the expected revenue is at that level. Suppose the current price of gold is $300 per ounce and the price

of gold is expected to increase at a rate of 5% per year for the foreseeable future. What is the current value of 0.2

million ounces of gold to be produced each year for the next five years (the discount rate is 8% per year)

A. $300 million C. 261.49 million

B. 275.70 million D. None of the above B & M - USSA company has an opportunity to invest in a gold mine. The initial investment is $150 million. The mine is

estimated to produce 80,000 ounces of gold per year for the next ten years. The extraction cost of gold per ounce is

$100 and the expected revenue is at that level. Suppose the current price of gold is $300 per ounce, the price of

gold is expected to increase by 10% for the next two years and at 4% afterward. They discount rate is 10%, what is

the current value of 0.2 million ounces of gold to be produced each year for the next 5 years?

A. $300 million C. $261.49 million

B. 281.07 million D. None of the above B & M

Net Annual Cost Savings

*. BRG Assembly, Inc. is considering the purchase of an automatic wirebonder which cost P750,000. It has a ten year

life without any salvage value. BRG would save P200,000 in labor costs annually as a result of the use of the new

machine. Power cost would however increase P25,000 annually. The cost of capital is 16%. The present value

factor for 10 years at 16% is 4.8332. The present value of the net annual cost savings is (E)

a. P845,810 c. P745,810

b. P575,000 d. P966,640 RPCPA 1097

62

. Pole Co. is investing in a machine with a 3-year life. The machine is expected to reduce annual cash operating

costs by $30,000 in each of the first 2 years and by $20,000 in year 3. Present values of an annuity of $1 at 14%

are:

Period 1 2 3

Factor 0.88 1.65 2.32

Using a 14% cost of capital, what is the present value of these future savings? (E)

a. $59,600 c. $62,900

b. $60,800 d. $69,500

63

. Murray is planning a project that will cost $22,000. The annual cash inflow, net of income taxes, will be $5,000 a

year for 7 years. The present value of $1 at 12% is as follows:

Period Present Value of $1 at 12%

1 .893

2 .797

3 .712

4 .636

5 .567

6 .507

7 .452

Using a rate of return of 12%, what is the present value of the cash flow generated by this project? (E)

a. $22,600 c. $34,180

b. $22,820 d. $35,000 AICPA 1177 I-23

Cash Flow for Certain Years

Questions 89 thru 91 are based on the following information. G & N 9e

(Ignore income taxes in this problem.) The Becker Company is interested in buying a piece of equipment that it needs.

The following data have been assembled concerning this equipment:

Cost of required equipment $250,000

Working capital required $100,000

Annual operating cash inflows $ 80,000

Cash repair at end of 4 years $ 40,000

Salvage value at end of 6 years $ 90,000

This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be

released for use elsewhere. The company’s discount rate is 10%. - The present value of all future operating cash inflows is closest to: (M)

a. $480,000. c. $348,400.

b. $452,300. d. $278,700. - The present value of the net cash flows (all cash inflows less all cash outflows) occurring during year 4 is: (E)

a. $40,000. c. $54,640.

b. $27,320. d. $42,790. - The present value of the net cash flows (all cash inflows less all cash outflows) occurring during year 6 is closest to:

a. $270,000. c. $107,200.

b. $195,900. d. $152,300.

Certain Year & Net Present Value

Questions 92 & 93 are based on the following information. G & N 9e

(Ignore income taxes in this problem.) UR Company is considering rebuilding and selling used alternators for

automobiles. The company estimates that the net operating cash flows (sales less cash operating expenses) arising

from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow):

Years 1 – 10 … $ 90,000

Year 11 …….. (20,000)

Year 12 …….. 100,000

In addition to the above net operating cash flows, UR Company would purchase production equipment costing $200,000

now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value.

The company’s discount rate is 10%. - The present value of the net operating cash flows (sales less cash operating expenses) arising from the rebuilding

and sale of the alternators (rounded to the nearest dollar) is: (M)

a. $582,735. c. $577,950.

b. $596,735. d. $591,950. - The net present value of all cash flows associated with this investment (rounded to the nearest dollar) is: (M)

a. $377,950. c. $392,950.

b. $382,735. d. $362,950.

Risk-adjusted Discount Rate

Questions 19 thru 21 are based on the following information. Gitman

A firm is considering investment in a capital project which is described below. The firm’s cost of capital is 18 percent and

the riskfree rate is 6 percent. The project has a risk index of 1.5. The firm uses the following equation to determine the

risk adjusted discount rate, RADR, for each project: RADR = Rf + Risk Index (Cost of capital Rf)

Initial Investment $1,000,000

Year Cash Inflow

1 $500,000

2 500,000

3 500,000 - The net present value without adjusting the discount rate for risk is

A. $336,000. C. $179,400.

B. $250,000. D. $87,000. - The discount rate that should be used in the net present value calculation to compensate for risk is

A. 6 percent. C. 18 percent.

B. 15 percent. D. 24 percent. - The net present value of the project when adjusting for risk is

A. $9,500. C. $87,000.

B. $0. D. $105,000.

Net Present Value Computation – Derivation

Given Payback Period

64

. Shannon Industries is considering a project which has the following cash flows:

Year Project Cash Flow

0 ?

1 $2,000

2 3,000

3 3,000

4 1,500

The project has a payback of 2.5 years. The firm’s cost of capital is 12 percent. What is the project’s net present

value NPV? (M)

a. $ 577.68 d. $2,761.32

b. $ 765.91 e. $3,765.91

c. $1,049.80 Brigham

Given Profitability Index - The McNally Co. is considering an investment in a project that generates a profitability index of 1.3. The present

value of the cash inflows on the project is $44,000. What is the net present value of this project? (M)

a. $10,154 c. $57,200

b. $13,200 d. $33,846 Barfield

Net Present Value – Ignore Income Taxes

Given Present Value of Cash Inflow - An initial investment of $400,000 will produce an end of year cash flow of $450,000. What is the NPV of the project

at a discount rate of 10%? (E)

A. $9090.90 C. $0 (zero)

B. $409,090.90 D. None of the above B & M

Combined Project - If the net present value of project A is +$80, and of project B is +$60, then the net present value of the combined

project is: (E)

A. +$80 C. +$140

B. +$60 D. None of the above B & M - If the NPV of project A is +$100, and that of project B is -$50 and that of project C is +$20, what is the NPV of the

combined project? (E)

A. $100 C. $120

B. -$50 D. $70 B & M - If the NPV of project A is +$50 and that of project B is -$60, then the NPV of the combined project is: (E)

A. +$50 C. -$10

B. +$60 D. None of the above. B & M

Single Cash Inflow - If the present value of a cash flow generated by an initial investment of $100,000 is $120,000, what is the NPV of

the project? (E)

A. $120,000 C. $100,000

B. $20,000 D. None of the above B & M

Even Cash Flows, No Present Value Table - An investment opportunity costing $75,000 is expected to yield net cash flows of $22,000 annually for five years.

The NPV of the investment at a cutoff rate of 12% would be

a. $(4,310) c. $75,000

b. $4,310 d. $79,310 D, L & H 9e - An investment opportunity costing $75,000 is expected to yield net cash flows of $23,000 annually for five years.

The NPV of the investment at a cutoff rate of 14% would be (E)

a. $(3,959). c. $75,000.

b. $3,959. d. $78,959. L & H 10e - An investment opportunity costing $110,000 is expected to yield net cash flows of $28,000 annually for six years.

The NPV of the investment at a cutoff rate of 12% would be (E)

a. $(5,108) c. $110,000

b. $5,108 d. $115,108 D, L & H 9e - An investment opportunity costing $150,000 is expected to yield net cash flows of $36,000 annually for six years.

The NPV of the investment at a cutoff rate of 12% would be (E)

a. $(2,004). c. $150,000.

b. $2,004. d. $147,996. L & H 10e - The Whitton Company uses a discount rate of 16%. The company has an opportunity to buy a machine now for

$18,000 that will yield cash inflows of $10,000 per year for each of the next three years. The machine would have no

salvage value. The net present value of this machine to the nearest whole dollar is: (E)

a. $22,460. c. $(9,980).

b. $4,460. d. $12,000. G & N 9e - Valentine Company is considering investing in a new project. The project will need an initial investment of

$1,200,000 and will generate $600,000 (after-tax) cash flows for three years. Calculate the NPV for the project if

the cost of capital is 15%. (E)

A. $16,994 C. $60,000

B. $29,211 D. $25,846 B & M - Elephant company is investing in a giant crane. It is expected to cost 2.2 million in initial investment and it is

expected to generate an end of year cash flow of 1.0 million each year for three years. Calculate the NPV at 12%

(approximately). (E)

A. 2.4 million C. 0.80 million

B. 0.20 million D. 0.40 million B & M

Even Cash Flow, With Present Value Table

*. A project requires the purchase of an asset for P6,500. Annual cash benefits are P2,000 for 5 years. The firm’s

cost of capital is 12% and the present value of an annuity of P1 for 5 periods at 12% is 3.605. The net present value

of the project is: (E)

a. P520 c. P710

b. P650 d. P805 RPCPA 1078

*. Alang-alang sa Lahat Foundation, Inc. a nonstock, nonprofit and tax-exempt foundation invested P1 million in a fiveyear project at the beginning of the year. The foundation estimates that the annual savings form the project will

amount to P325,000. The P1 million asset is depreciable over five (5) years on a straight-line basis. The

foundation’s hurdle rate is 12%. To facilitate computations, below are present value factors:

N=5 12% 14% 16%

Present value of P1 0.57 0.52 0.48

Present value of an annuity of P1 3.60 3.40 3.30

The net present value of the project is (E)

a. P170,000 c. P182,000

b. P625,000 d. P450,000 RPCPA 1095

Questions 8, 9 and 10 are based on the following information. RPCPA 1077

ABC Manufacturing Company is taking into account two alternative strategies to market a new product. To make known

the product will necessitate an outlay of P75,000. With a low price the product will generate cash proceeds of P50,000

per year and will have a life of two years. With a high price the product will generate cash proceeds of P90,000 but will

have a life of only one year. The cost of money for the company is 10%. The following is the table of Present Value of

10%

N Present Value of P1 Present Value of P1 Received per Period

1 .9091 0.9091

2 .8264 1.7355

3 .7513 2.4869

4 .6830 3.1699

5 .6209 3.7908

*. The net present value of the low-price product strategy is:

a. P11,775 c. P75,000

b. P25,000 d. P175,000

*. The net present value of the high-price strategy is:

a. P6,819 c. P65,000

b. P15,342 d. P165,000

*. The marketing strategy that should be accepted is:

a. The low-price strategy c. Either of the two marketing strategies

b. The high-price strategy d. Neither of the two marketing strategies

Even Cash Flow, Salvage Value, No Present Value Table. - (Ignore income taxes in this problem.) A piece of equipment has a cost of $20,000. The equipment will provide cost

savings of $3,500 each year for ten years, after which time it will have a salvage value of $2,500. If the company’s

discount rate is 12%, the equipment’s net present value is: (M)

a. $580. c. $17,500.

b. ($225). d. $2,275. G & N 9e - A new grocery store cost $30 million in initial investment. It is estimated that the store will generate 2 million dollars

after tax cash flow for five years. At the end of 5 years it can be sold for $40 million. What is the NPV of the project

at a discount rate of 10%?

A. $2.42 million C. $.69 million

B. $18 million D. None of the above B & M - A new grocery store cost $30 million in initial investment. It is estimated that the store will generate 2 million dollars

after tax cash flow for five years. At the end of 5 years it can be sold for $35 million. What is the NPV of the project

at a discount rate of 10%?

A. $2.42 million C. $-0.69 million

B. $18 million D. None of the above B & M - The following data pertain to an investment:

Cost of the investment $18,955

Life of the project 5 years

Annual cost savings $ 5,000

Estimated salvage value $ 1,000

Discount rate 10%

The net present value of the proposed investment is: (M)

a. $3,355. c. $-0-.

b. ($3,430). d. $621. G & N 9e - The following data pertain to an investment proposal:

Cost of the investment $20,000

Annual cost savings $ 5,000

Estimated salvage value $ 1,000

Life of the project 8 years

Discount rate 16%

The net present value of the proposed investment is: (M)

a. $1,720. c. $2,154.

b. $6,064. d. $2,025. G & N 9e - Sam Weller is thinking of investing $70,000 to start a bookstore. Sam plans to withdraw $15,000 from the business

at the end of each year for the next five years. At the end of the fifth year, Sam plans to sell the business for

$110,000 cash. At a 12% discount rate, what is the net present value of the investment? (M)

a. $54,075. c. $46,445.

b. $62,370. d. $70,000. G & N 9e

Even Cash Flow, Working Capital, No Present Value Table - Parks Company is considering an investment proposal in which a working capital investment of $10,000 would be

required. The investment would provide cash inflows of $2,000 per year for six years. The working capital would be

released for use elsewhere when the project is completed. If the company’s discount rate is 10%, the investment’s

net present value is: (M)

a. $1,290. c. $2,000.

b. ($1,290). d. $4,350. G & N 9e - Boston Company is contemplating the purchase of a new machine on which the following information has been

gathered:

Cost of the machine $38,900

Annual cash inflows expected $10,000

Salvage value $ 5,000

Life of the machine 6 years

The company’s discount rate is 16%, and the machine will be depreciated using the straight-line method. Given

these data, the machine has a net present value of: (M)

a. -$26,100. c. $0.

b. -$23,900. d. +$26,100. G & N 9e

Even Cash Flow, Salvage Value, Working Capital, No Present Value Table - A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital

of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years.

Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line

depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30%

and the cost of capital is 15%. Calculate the NPV of the project. (M)

A. 8443 C. –2735

B. 3840 D. None of the above B & M - The following data pertain to an investment in equipment:

Investment in the project $10,000

Net annual cash inflows 2,400

Working capital required 5,000

Salvage value of the equipment 1,000

Life of the project 8 years

At the completion of the project, the working capital will be released for use elsewhere. Compute the net present

value of the project, using a discount rate of 10%: (M)

a. $606. c. ($1,729).

b. $8,271. d. $1,729. G & N 9e - The following data pertain to an investment proposal:

Investment in the project (equipment) $14,000

Net annual cash inflows promised 2,800

Working capital required 5,000

Salvage value of the equipment 1,000

Life of the project 10 years

The working capital would be released for use elsewhere when the project is completed. What is the net present

value of the project, using a discount rate of 8%? (M)

a. $2,566. c. $251.

b. ($251). d. $5,251. G & N 9e

Questions 87 & 88 are based on the following information. G & N 9e

The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are

available on the projects:

Project X Project Y

Cost of equipment needed now … $80,000 —

Working capital requirement …. — $80,000

Annual cash operating inflows .. $23,000 $18,000

Salvage value in 5 years ……. $ 6,000 —

Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use

elsewhere. Sawyer’s discount rate is 12%. - The net present value of project X is: (M)

a. $2,915. c. $5,283.

b. $(11,708). d. $6,317. - The net present value of project Y is closest to: (M)

a. $15,110. c. $11,708.

b. $30,250. d. $(11,708).

Questions 96 thru 98 are based on the following information. G & N 9e

Lambert Manufacturing has $60,000 to invest in either Project A or Project B. The following data are available on these

projects:

Project A Project B

Cost of equipment needed now $120,000 $70,000

Working capital investment needed now – $50,000

Annual net operating cash inflows $ 50,000 $45,000

Salvage value of equipment in 6 years $ 15,000 –

Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use

elsewhere. Lambert’s discount rate is 14%. - The net present value of Project A is closest to: (M)

a. $82,241. c. $74,450.

b. $67,610. d. $81,290. - The net present value of Project B is closest to: (M)

a. $77,805. c. $55,005.

b. $127,805. d. $105,005. - Which of the following statements is (are) correct?

I. Project A is acceptable according to the net present value method.

II. Project A has an internal rate of return greater than 14%. (M)

a. Only I. c. Both I and II.

b. Only II. d. Neither I nor II.

Even Cash Flow, Salvage Value for Old & New Machine, Working Capital, No PV Table

Questions 94 & 95 are based on the following information. G & N 9e

Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced

with a new system. The following data have been gathered concerning these two alternatives:

Present System Proposed New System

Purchase cost new $250,000 $300,000

Accumulated depreciation $240,000 –

Overhaul costs needed now $230,000 –

Annual cash operating costs $180,000 $170,000

Salvage value now $160,000 –

Salvage value at the end of 8 years $152,000 $165,000

Working capital required – $200,000

Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives

are expected to have a useful life of eight years. (Use three decimal places for PV factor) - The net present value of the alternative of overhauling the present system is: (D)

a. $(1,279,316). c. $801,284.

b. $(1,119,316). d. $(1,194,036). - The net present value of the alternative of purchasing the new system is: (D)

a. $(1,076,495). c. $(1,169,895).

b. $(1,236,495). d. $(969,895).

Uneven Cash Flows, No Present Value Table. - What is the net present value of the following cash flow at a discount rate of 15%?

T=0 t=1 t=2

-120,000 -100,000 300,000

A. $19,887 C. $26,300

B. $80,000 D. None of the above B & M - What is the net present value of the following cash flows at a discount rate on 12%

t = 0 t = 1 t=2 t=3

-250,000 100,000 150,000 200,000

A. $101,221 C. $142,208

B. $200,000 D. None of the above B & M - Given the following cash flow for project A: C0

= -2000, C1

= +500, C2 = +1500 and C3

= +5000, calculate the NPV

of the project using a 15% discount rate. (E)

A. $5000 C. $3201

B. $2857 D. $2352 B & M

65

. The Seattle Corporation has been presented with an investment opportunity which will yield end-of-year 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. What is the NPV for this

investment? (M)

a. $135,984 d. $ 51,138

b. $ 18,023 e. $ 92,146

c. $219,045 Brigham

66

. You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per

year for Years 6-8, and $2,000 per year for Years 9 and 10. If you require a 14 percent rate of return, and the cash

flows occur at the end of each year, then how much should you be willing to pay for this investment? (M)

a. $15,819.27 d. $38,000.00

b. $21,937.26 e. $52,815.71

c. $32,415.85 Brigham - USSA company has an opportunity to invest in a gold mine. The initial investment is $150 million. The mine is

estimated to produce 80,000 ounces of gold per year for the next ten years. The extraction cost of gold per ounce is

$100 and the expected revenue is at that level. The current price of gold is $300 per ounce and it is expected to

increase by 4% per year for the next 10 years. What is the NPV of the project at a discount rate of 10%? (Ignore

taxes.) (D)

A. $-34 million. C. $-27.5 million

B. $40.8 million D. None of the above B & M

67

. Grant Company 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 net present value of the investment, assuming no taxes are paid?

a. $7,000 c. $40,911

b. $10,911 d. $37,000 H & M

68

. A capital investment project requires an investment of $50,000 and has an expected life of 4 years. Annual cash

flows at the end of each year are expected to be as follows:

Year Amount

1 $20,000

2 24,000

3 38,000

4 28,000

Ignoring income taxes, the net present value of the project using a 6% discount rate is

a. $44,316 c. $34,148

b. $12,396 d. $(14,148) H & M

69

. The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950,000. The

investment is expected to generate $350,000 in annual cash flows for a period of four years. The required rate of

return is 14%. The old machine can be sold for $50,000. The machine is expected to have zero value at the end of

the four-year period. What is the net present value of the investment? Would the company want to purchase the

new machine? Income taxes are not considered. (M)

a. $119,550; yes c. $1,019,550; yes

b. $69,550; no d. $326,750; no Horngren

70

. Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine

is operable for three more years and will have a zero disposal price. If the machine is disposed of now, it may be

sold for $60,000. The new machine will cost $200,000 and an additional cash investment in working capital of

$60,000 will be required. The new machine will reduce the average amount of time required to wash clothing and

will decrease labor costs. The investment is expected to net $50,000 in additional cash inflows during the year of

acquisition and $150,000 each additional year of use. The new machine has a three-year life, and zero disposal

value. These cash flows will generally occur throughout the year and are recognized at the end of each year.

Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of

the asset’s life.

What is the net present value of the investment, assuming the required rate of return is 10%? Would the company

want to purchase the new machine? (M)

a. $82,000; yes c. $(50,000); yes

b. $50,000; no d. $(82,000); no Horngren

71

. Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine

is operable for three more years and will have a zero disposal price. If the machine is disposed of now, it may be

sold for $60,000. The new machine will cost $200,000 and an additional cash investment in working capital of

$60,000 will be required. The new machine will reduce the average amount of time required to wash clothing and

will decrease labor costs. The investment is expected to net $50,000 in additional cash inflows during the year of

acquisition and $150,000 each additional year of use. The new machine has a three-year life. These cash flows will

generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in

this problem. The working capital investment will not be recovered at the end of the asset’s life.

What is the net present value of the investment, assuming the required rate of return is 24%? Would the company

want to purchase the new machine? (M)

a. $(32,800); yes c. $16,400; yes

b. $(16,400); no d. $32,800; no Horngren

72

. Wet and Wild Water Company drills small commercial water wells. The company is in the process of analyzing the

purchase of a new drill. Information on the proposal is provided below.

Initial investment:

Asset $160,000

Working capital $ 32,000

Operations (per year for four years):

Cash receipts $160,000

Cash expenditures $ 88,000

Disinvestment:

Salvage value of drill (existing) $ 16,000

Discount rate 20%

What is the net present value of the investment? Assume there is no recovery of working capital. (M)

a. $(62,140) c. $42,362

b. $10,336 d. $186,336 Horngren

Uneven Cash Flow, With Present Value Table

*. You have been consulted to advise CPA Corp. on the projected acquisition of another production line costing P1

million. The line has an expected useful life of 5 years without any salvage value. The company’s hurdle rate is

20% and the following information were made available to you.

Year Estimated Annual Cash Inflow Present Value of P1 at 20%

1 P 600,000 0.91

2 300,000 0.76

3 200,000 0.63

4 200,000 0.53

5 200,000 0.44

P 1,500,000 3.27

Assuming that the cash flow is generated evenly during the year, your advice is (E)

a. To invest due to net present value of P94,000.

b. To invest due to net present value of P541,280.

c. To invest due to net present value of P635,000.

d. To invest due to net advantage of P500,000. RPCPA 1096

*. ABC Corporation is planning to buy production machinery costing P100,000. This machinery’s expected useful life

is 5 years, with no residual value. ABC requires a rate of return of 20%, and has calculated the following data

pertaining to the purchase and operation of this machinery:

Year Estimated Annual Cash Inflow Present Value of P1 at 20%

1 P 60,000 0.91

2 30,000 0.76

3 20,000 0.63

4 20,000 0.53

5 20,000 0.44

P 150,000 3.27

What is the net present value of this investment? (E)

a. P80,000. c. P109,400

b. P9,400. d. P54,128 RPCPA 1001 - Kanlaon University has a telephone system that is in poor condition. The system either can be overhauled or

replaced with a new system. The following data have been gathered concerning these two alternatives:

Present System Proposed New System

Purchase cost – new P250,000 P300,000

Accumulated depreciation 240,000 -0-

Overhaul costs needed now 230,000 -0-

Annual cash operating costs 180,000 170,000

Salvage value now 160,000 -0-

Salvage value at the end of 8 years 152,000 165,000

Working capital required -0- 200,000

Kanlaon University uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both

alternatives are expected to have a useful life of eight years. The present value at 10% of annuity of 1 for 8 periods

is 5.33493 and of 1 at the end of 8 periods is 0.46651.

In deciding based on the less cost to the university, the net present value of the alternative of purchasing the new

system is (Note: Use only three decimal places for PV factors).

A. P1,076,662 C. P1,236,662

B. P1,392,662 D. P1,084,662 Pol Bobadill