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
