Scribd
Upload
62 views4 pages

Activity - Capital Investment Analysis

This document contains a capital investment analysis activity with multiple choice and problem solving questions. Some key points: - The activity contains questions to test understanding of capital budgeting techniques like net present value, internal rate of return, payback period, and profitability index. - One problem involves calculating NPV, IRR, and profitability index to compare two investment alternatives. Machine 2 is preferred as it has a higher NPV, profitability index, and IRR. - Another problem calculates the payback period of an investment with an initial cost of $20,000 and annual after-tax cash flows of $5,125. The payback period is found to be 3.9 years.

Uploaded by

KATHRYN CLAUDETTE RESENTE
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
62 views4 pages

Activity - Capital Investment Analysis

This document contains a capital investment analysis activity with multiple choice and problem solving questions. Some key points: - The activity contains questions to test understanding of capital budgeting techniques like net present value, internal rate of return, payback period, and profitability index. - One problem involves calculating NPV, IRR, and profitability index to compare two investment alternatives. Machine 2 is preferred as it has a higher NPV, profitability index, and IRR. - Another problem calculates the payback period of an investment with an initial cost of $20,000 and annual after-tax cash flows of $5,125. The payback period is found to be 3.9 years.

Uploaded by

KATHRYN CLAUDETTE RESENTE
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

ACTIVITY- CAPITAL INVESTMENT ANALYSIS

Name: Resente, Kathryn Claudette U.

Year/Section:BSAC02

THEORIES- Choose the best answer among the given choices.

___1. Statement 1: When cash flows are uneven and vary from year to year, the internal rate of return
method is easier to use than the net present value method

Statement 2: For capital budgeting decisions, the net present value method is superior to the
simple rate of return method.

___2. Statement 1: Depreciation is included as a cash flow in capital budgeting decisions to ensure
that the original cost of the asset is fully recovered.

Statement 2: Even when done properly, the total cost and incremental cost approaches to
choosing between alternatives will sometimes yield different answers.

___3. Statement 1: An increase in the expected salvage value at the end of a capital budgeting project
will have no effect on the internal rate of return for that project.

Statement 2: The intangible benefits of automation cannot be estimated with any accuracy and
therefore should be ignored in capital budgeting decisions.

___4. Statement 1: When making preference decisions about competing investment proposals, the
project profitability index is superior to the internal rate of return.

Statement 2: The project profitability index is computed by dividing the net present value of the
project by the investment required by the project.

___5. Statement 1: In calculating the “investment required” for the project profitability index, the
amount invested should be reduced by any salvage recovered from the sale of old equipment.

Statement 2: The payback method is most appropriate for projects whose cash flows extend far
into the future.

6. A

7. C

8. D

9. A

10. C
PROBLEMS- Provide the answer and show your solutions.

1. A. 2.50
Sales P10,000
Cost of goods sold (P10,000 x 50%) ( 6,000)
Fixed costs ( 2,000)
Cash flows from operations P 2,000
The payback period is 2.50 yrs (P5,000/P2,000).

2. B. 1.20
Profitability Index = $120,000/$100,000 = 1.20

3. B. P23,256

P10,000 /0.65 = P15,384.61

Use PV Table for 4 years, 11%. Constant = 0.6587

P15384.61 / 0.6587 = P23,356.


4. A. P113,004
Annual depreciation = P50,000
Tax savings = P20,000
Use PV of Annuity table 10 years, 12%; Constant = 5.6502
P20,000 * 5.6502 = P113,004
5. D. P144,996

Use PV of Annuity Table; 10 years, 16%; Constant = 4.8330

P30,000 * 4.8330 = P144,496

6. B. Between 3% and 4%

P250,000/P30,000 = 8.33

Using PV of Annuity Table and 10 years, this constant falls between 3% and 4%

7. C. P2,878

Year Difference in After-Tax Difference PV of $1 Discounted


Depreciation
Table Value Value
1 P 20,000 P 8,000 0.9091 P 7,272

2 P 10,000 P 4,000 0.8265 P 3,306

3 P -0- P 0- 0.7513 $ P -0-

4 P(10,000) P(4,000) 0.6830 P(2,732)

5 P(20,000) P(8,000) 0.6209 P(4,967)

Total P 2,878

======

8. B. 3.90 years

Payback Period = Investment/After-Tax Cash Flows

After Tax Cash Flows = [(6,000 *0.75) + (2,500 *0.25)] = P5,125

Payback Period = P20,000/P5,125 = 3.90 years


9.

(1)

Machine 1 Machine 2

Present value of net cash flows P157,010 P179,440


Capital investment 152,000 170,000
Net present value P5,010 P9,440
(P35,000 × 4.486) (P40,000 × 4.486)

Machine 1 Machine 2

P157,010/ P179,440/
(2)Profitability index P152,000 P170,000
=1.03 =1.06
(3)
Machine 1 Machine 2
Internal rate of return factor P152,000/ P170,000/
P35,000 P40,000
=4.34 =4.25

Internal rate of return 10%(4.355 factor) 11%(4.231 factor)

10.
(b) Both machines are acceptable because both show a positive net present value,
have a profitability index above 1, and have an internal rate of return greater than the
company's minimum required rate of return. Machine 2 is preferred because its net
present value, profitability index, and internal rate of return are all greater than Machine 1's
amounts.

You might also like