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Acme is considering the sale of a machine with a book value of P160,000 and 3 years remaining in its useful
life. Straight-line depreciation of P50,000 annually is available. The machine has a current market value of
P200,000. What is the cash flow from selling the machine if the tax rate is 40%?
a. P50,000
b. P160,000
c. P184,000
d. P200,000
Altoona Company is considering replacing a machine with a book value of P200,000, a remaining useful life
of 4 years, and annual straight-line depreciation of P50,000. The existing machine has a current market value
of P175,000. The replacement machine would cost P320,000, have a 4 year life, and save P100,000 per year in
cash operating costs. If the replacement machine would be depreciated using the straight-line method and the
tax rate is 40%, what would be the increase in annual income taxes if the company replaces the machine?
a. P28,000
b. P40,000
c. P42,000
d. P64,000
An investment opportunity costing P300,000 is expected to yield net cash flows of P100,000 annually for five
years. The profitability index of the investment at a cutoff rate of 14% would be
a. 3.0.
b. 1.14.
c. 0.33.
d. 14%.
A project has a NPV of P30,000 when the cutoff rate is 10%. The annual cash flows are P41,010 on an
investment of P100,000. The profitability index for this project is
a. 1.367.
b. 3.333.
c. 2.438.
d. 1.300.
Portage Press Company is considering replacing a machine with a book value of P200,000, a remaining useful
life of 5 years, and annual straight-line depreciation of P40,000. The existing machine has a current market
value of P200,000. The replacement machine would cost P300,000, have a 5-year life, and save P100,000 per
year in cash operating costs. If the replacement machine would be depreciated using the straight-line method
and the tax rate is 40%, what would be the increase in annual net cash flow if the company replaces the
machine?
a. P60,000
b. P68,000
c. P76,000
d. P84,000
Winneconne Company is considering replacing a machine with a book value of P400,000, a remaining useful
life of 5 years, and annual straight-line depreciation of P80,000. The existing machine has a current market
value of P400,000. The replacement machine would cost P550,000, have a 5-year life, and save P75,000 per
year in cash operating costs. If the replacement machine would be depreciated using the straight-line method
and the tax rate is 40%, what would be the net investment required to replace the existing machine?
a. P90,000
b. P150,000
c. P330,000
d. P550,000
An investment opportunity costing P75,000 is expected to yield net cash flows of P23,000 annually for five
years. The NPV of the investment at a cutoff rate of 14% would be
a. P(3,959).
b. P3,959.
c. P75,000.
d. P78,959.
An investment opportunity costing P55,000 is expected to yield net cash flows of P22,000 annually for five
years. The payback period of the investment is
a. 0.4 years.
b. 2.5 years.
c. P33,000.
P420,000
Useful life of machinery ............................
12 years
Expected salvage value in 12 years ...........
P0
Expected annual revenue (50,000 jars) ..... P210,000
P210,000
Expected annual variable costs ................. P135,000
P42,000
Expected annual fixed costs ...................... P30,000
P72,000
Perky's discount rate is 12%. Perky uses the straight-line method of depreciation.
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What is the net present value of automating operations using the incremental cost approach?
A) P11,940
B) P56,940
C) P(104,106)
D) P112,684
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Within what range does the internal rate of return fall?
A) 6% to 8%
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B) 10% to 12%
C) 12% to 14%
D) 18% to 20%
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C) P6,000 or more
D) P10,824 or more
(Ignore income taxes in this problem.) 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 12% required rate of return, the net present value of the cash flows associated
with just the tangible costs and benefits is a negative P282,500. How large would the annual net cash inflows
from the intangible benefits have to be to make this a financially acceptable investment?
A) P20,000
B) P28,250
C) P35,000
D) P50,000
(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 P9,000 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 P17,000?
A) P43,812
B) P26,812
C) P17,000
D) P22,195
(Ignore income taxes in this problem.) Anthony operates a part time auto repair service. He estimates that a
new diagnostic computer system will result in increased cash inflows of P1,500 in Year 1, P2,100 in Year 2,
and P3,200 in Year 3. If Anthony's required rate of return is 10%, then the most he would be willing to pay for
the new computer system would be:
A) P4,599
B) P5,501
C) P5,638
D) P5,107
(Ignore income taxes in this problem.) Fossa Road Paving Company is considering an investment in a curbforming machine. The machine will cost P240,000, will last 10 years, and will have a P40,000 salvage value at
the end of 10 years. The machine is expected to generate net cash inflows of P60,000 per year in each of the 10
years.Fossa's discount rate is 18%. What is the net present value of this machine?
A) P5,840
B) P37,280
C) P(48,780)
D) P69,640
A company is considering the purchase of a machine that promises to reduce operating costs by the same
amount for every year of its 6-year useful life. The machine will cost P83,150 and has no salvage value. The
machine has a 20% internal rate of return. Ignore income taxes. The annual cost savings promised by the
machine is
a. P25,000
b. P50,000
c. P35,000
d. P20,000
Whogoat Inc. is considering replacing an old machine that cost P900,000sixyears ago with a new one that
would cost P2,150,000. Shipping and installation would cost an additional P150,000. The old machine has a
book value of P300,000 and could be currently sold for P40,000. The increased production of the new
machine would increase inventories by P60,000, accounts receivable by P180,000 and accounts payable by
P125,000. Whogoats net initial investment for analyzing the acquisition of the new machine assuming a 35%
income tax rate would be
a. P2425,000
b. 2,276,000
c. 2,449,000
d. 2,415,000
A company considers a project that will generate cash sales of P45,000 per year. Fixed costs will be P12,000
per year, variable costs will be 35% of sales and depreciation of the equipment in the project will be P6,500
per year. Taxes are 30%. The expected annual cash flow to the company resulting from the project is
a. P 14,025
b. 7,525
c. 14,000
d. 17,250
Prepared by:
JADE BALLADO-TAN, CPA, MBA
Subject Instructor