ACT 121 FINAL EXAMINATION

Maria Cristina P. Obeso, CPA, MBA

Multiple Choice Theory and Problem: Write the letter of the correct answer on your answer
sheet
1. What is the opportunity cost of making a component part in a factory given no
alternative use of the capacity?
a. The variable manufacturing cost of the component.
b. The total manufacturing cost of the component.
c. The total variable cost of the component.
d. Zero.

2. The relevance of a particular cost to a decision is determined by

A. Riskiness of the decision. C. Amount of the cost.
B. Number of decision variables. D. Potential effect on the decision.

3. A fixed cost is relevant if it is

A.a future cost. B. avoidable. C. sunk. D. a product cost.

4. Management accountants are concerned with incremental unit costs. These costs are
similar to the following except
a.The economic marginal cost. c. The cost to produce an additional unit.
b.The variable cost d. The manufacturing unit cost.

5. The type of cost vital to decision making but not recorded in the accounting records
a.Sunk costs b. Opportunity costs c. Direct costs d. Out of pocket costs

6. In analyzing whether to build another regional service office, the salary of the Chief
Executive Officer (CEO) at the corporate headquarters is
a. Relevant because salaries are always relevant.
b. Relevant because this will probably change if the regional service office is build.
c. Irrelevant because it is future cost that will not differ between the alternatives
under consideration.
d. Irrelevant since another imputed costs for the same will be considered.

7. Assume a company produces three products: A, B, and C. It can only sell up to 3,000
units of each product. Production capacity is unlimited. The company should produce
the product (or products) that has (have) the highest
a. contribution margin per hour of machine time.
b. gross margin per unit.
c. contribution margin per unit.
d. sales price per unit.

8. The distinction between avoidable and unavoidable costs is similar to the distinction
between
a.variable costs and fixed costs. c. step-variable costs and fixed costs.
b.variable costs and mixed costs. d. discretionary costs and committed costs.

9. Total unit costs are

a. Relevant for cost-volume-profit analysis.
b. Needed for determining product contribution.
 c. Irrelevant in marginal analysis.
d. Independent of the cost system used to generate them.

10. If a cost is irrelevant to a decision, the cost could not be

a.a sunk cost. b. a future cost. c. a variable cost. d. an incremental
cost.

11. Among the costs relevant to a make-or-buy decision include variable manufacturing costs as
well as
a. Unavoidable costs. c. Avoidable fixed costs.
b. Plant depreciation. d. Real estate taxes
12. In a make or buy decision, the opportunity cost of capacity could
a. be considered to decrease the price of units purchased from suppliers.
b. be considered to decrease the cost of units manufactured by the company.
c. be considered to increase the price of units purchased from suppliers.
d. not be considered since opportunity costs are not part of the accounting records.

13. Which of the following activities within an organization would be least likely to be
outsourced?
a. accounting b. product design c. transportation d. data processing
14. Relevant costs for pricing a special order include
a. existing fixed manufacturing overhead.
b. nonmanufacturing costs that will not change even if the special order is accepted.
c. additional setup costs for the special order.
d. all of the above costs.

15. A price-bidding decision for a one-time-only special order includes an analysis of

a. all manufacturing costs.
b. all cost drivers related to the product.
c. all direct and indirect variable costs of each function in the value chain.
d. all fixed manufacturing costs.

16. The process of developing budget estimates by requiring all levels of management to
estimate sales, production,
and other operating data as though operations were being initiated for the first time is referred
to as:
a. flexible budgeting
b. continuous budgeting
c. zero-based budgeting
d. master budgeting

17. The primary difference between a fixed budget and a flexible budget is that a fixed budget
a. cannot be changed after the period begins, whereas flexible budget can be changed after the
period
begins.
b. is concerned only with future acquisitions of fixed assets, whereas a flexible budget is
concerned with
expenses that vary with sales.
c. includes only fixed costs, whereas a flexible budget includes only variable costs.
d. is a plan for a single level of production, whereas a flexible budget can be converted to any
level of
production

18. A disadvantage of static budgets is that they:

a. start with a clean slate
b. cannot be used by service companies
c. do not show possible changes in underlying activity levels
d. show the expected results of a responsibility center for several levels of activity

19.. Budgeting supports the planning process by encouraging all of the following activities
except:
a. requiring all organizational units to establish their goals for the upcoming period
b. increasing the motivation of managers and employees by providing agreed-upon
expectations
c. directing and coordinating operations during the period
d. improving overall decision making by considering all viewpoints, options, and cost reduction
possibilities

20.The starting point for creating a master budget for a state university would be
a. Forecasting enrollment
b. Preparing a capital expenditure budget
c. Forecasting the expected annual costs, considering prior year actual data
d. Forecasting the expected annual costs, considering prior year actual data and
appropriationsapproved by the national government

21, A product-line or department should be dropped if

a. It has negative incremental profit.
b. It has a negative contribution margin.
c. It is not essential to the company’s product line.
d. Dropping it will increase the total profit of the company.

22. In capital rationing problems, the manager should normally prioritize the project with the
highest
a. NPV
b. IRR
c. Profitability index
d. Accounting rate of return

23. Which of the following does not describe cost of capital?

a. Cut-off rate of return
b. Hurdle rate of return
c. Breakeven rate of return
d. Minimum rate of return

24. Which of the following represents the biggest challenge in the decision to purchase new
equipment?
a. Estimating employee training for the new project.
b. Estimating cash flows for the future.
c. Estimating transportation costs of the new equipment.
d. Estimating maintenance costs for the new equipment.

25. . The following measures have been calculated to appraise a proposed project
The internal rate of return is 12%
The return on capital employed is 16%
The cost of capital is 10%
The payback period is 4 years
Which of the following statements is correct?
a. the payback is less than 5 years so the project should go ahead
b. the IRR is lower than the return on capital employed so the project
should not go ahead
c. the IRR is greater than the cost of capital so the project should go
ahead
d. the IRR is positive so the project should go ahead

26. Shiatzu Company plans to replace an old machine with a new one. For capital
budgeting purposes, which of the following shall be considered in the calculation
of initial cost of net investment?
a. Cost of the old machine and salvage value of the new machine
b. Cost of the new machine and salvage value of the old machine
c. Cost and salvage value of the old machine
d. Cost and salvage value of the new machine

27. A project’s net present value, ignoring income tax considerations, is normally
affected by the
a. Proceeds from the sale of the asset to be replaced
b. Amount of annual depreciation on the asset to be replaced
c. Carrying amount of the assets to be replaced by the project
d. Amount of annual depreciation on fixed assets used directly on the
project

28 The internal rate of return (IRR) is the discount rate at which

a. Present value of cash outflows shall be maximum
b. Present value of cash inflows shall be minimum
c. Cost of capital shall be zero
d. Profitability index is 1.0

29. Net present value as used in investment decision-making is stated in terms of

which of the following options?
a. Cash flow after tax
b. Cash flow before tax
c. Earnings before interest and tax
d. Earnings before tax but after interest

30. Budgets are typically not used for

a. Planning purposes

b. Performance evaluation purposes

c. Communicating financial objectives
d. Complying with regulatory requirements

31. Which is usually treated as relevant in short-term decision making?

a. Joint costs in ‘sell-or-process’ decisions
b. Inventory costs in ‘scrap-or-rework’ decisions
c. Avoidable fixed costs in ‘make-or-buy’ decisions
d. Shutdown costs in ‘continue-or-shutdown’ decisions

32. Contribution margin and segment margin normally differ due to

a. Direct fixed costs
b. Indirect fixed costs
c. Variable manufacturing costs
d. Variable non-manufacturing costs

33. The master budget is a static budget because it

a. Always contains the same operating and financial budgets
b. Is geared to only one level of production and sales
c. Never changes from one year to the next
d. Covers a preset period of time

34. A cost not relevant to deciding whether to purchase a new machine is:
a. The cost of the old machine
b. The cost of the new machine
c. Lower maintenance costs for the new machine
d. Additional training required for operating the new machine

35.Which of the following are benefits of budgeting?

1) It establishes a system of control
2) It fulfills legal reporting obligations
3) It is a starting point for strategic planning
4) It helps coordinate the activities of different departments

a. 1 and 2
b. 2 and 3
c. 3 and 4
d. 4 and 1

36. Identify the committed cost that is most likely a shutdown cost.
a. Rental
b. Research
c. Advertisement
d. Special projects

37. The primary advantages of the average rate of return method are its ease of computation
and the fact that:
A. It is especially useful to managers whose primary concern is liquidity
B. There is less possibility of loss from changes in economic conditions and obsolescence
when the commitment is short-term
C. It emphasizes the amount of income earned over the life of the proposal
D. Rankings of proposals are necessary

38. The profitability index

A. does not take into account the discounted cash flows.
B. Is calculated by dividing total cash flows by the initial investment.
C. allows comparison of the relative desirability of projects that require differing initial
investments.
D. will never be greater than 1.0.

39. When comparing NPV and IRR, which is not true?

A. With NPV, the discount rate can be adjusted to take into account increased risk and the
uncertainty of cash flows
B. With IRR, cash flows can be adjusted to account for risk
C. NPV can be used to compare investments of various size or magnitude
D. Both NPV and IRR can be used for screening decisions

40. In choosing from among mutually exclusive investments the manager should normally
select the one with the highest
A. Net present value. C. Profitability index.
B. Internal rate return. D. Book rate of return.
41. How should the following projects be listed in order of increasing risk?
A. New venture, replacement, expansion.
B. Replacement, new venture, expansion.
C. Replacement, expansion, new venture.
D. Expansion, replacement, new venture.

42. In evaluating high-tech projects,

A. only tangible benefits should be considered.
B. only intangible benefits should be considered.
C. both tangible and intangible benefits should be considered.
D. neither tangible nor intangible benefits should be considered.

43. Which of the following is not a typical cash inflow in capital investment decisions?
A. Incremental revenues C. Salvage value
B. Cost reductions D. Additional working capital

44. Which of the following is NOT a defect of the payback method?

A. It ignores cash flows because it uses net income.
B. It ignores profitability.
C. It ignores the present values of cash flows.
D. It ignores the pattern of cash flows beyond the payback period.
45. The relationship between payback period and IRR is that
A. a payback period of less than one-half the life of a project will yield an IRR lower than the
target rate.
B. the payback period is the present value factor for the IRR.
C. a project whose payback period does not meet the company's cutoff rate for payback will not
meet the company's criterion for IRR.
D. payback and IRR are not related.

46. Bolsa Co. estimates that 60,000 special zipper will be used in the manufacture of industrial
bags during the next year. Sure Zipper Co. has quoted a price of P6 per zipper. Bolsa would
prefer to purchase 5,000 units per month but Sure is unable to guarantee this delivery
schedule. In order to ensure the availability of these zippers, Bolsa is considering the
purchase of all 60,000 units at the beginning of the year. Assuming that Bolsa can invest
cash at 12%, the company’s opportunity cost of purchasing the 60,000 units at the
beginning of the year is
a. P21,600 b. P43,200 c. P19,800 d. P39,600
47. Chow Inc. has its own cafeteria with the following annual costs
Food P 400,000
Labor 300,000
Overhead 440,000
Capital P1,140,000
The overhead is 40% fixed. Of the fixed overhead, P100,000 is the salary of the cafeteria
supervisor. The remainder of the fixed overhead has been allocated from total company
overhead. Assuming the cafeteria supervisor will remain and that Chow will continue to pay
said salary, the maximum cost Chow will be willing to pay an outsider firm to service the
cafeteria is
 a. P1,140,000 b. P1,040,000 c. P700,000 d. P964,000

48. Listed below are a company’s monthly unit costs to manufacture and market a particular
product.
Unit Costs Variable Cost Fixed Costs
Direct materials $2.00
Direct labor 2.40
Indirect Manufacturing 1.60 $1.00
Marketing 2.50 1.50
The company must decide to continue making the product or buy it from an outside
supplier. The supplier has offered to make the product at the same level of quality that the
company can make it. Fixed marketing costs would be unaffected, but variable marketing
costs would be reduced by 30% if the company were to accept the proposal. What is the
maximum amount per unit that the company can pay the supplier without decreasing its
operating income?
a. $8.50 b. $6.75 c. $7.75 d. $5.25
49. Savage Industries is a multi-product company that currently manufactures 30,000 units

of Part QS42 each month for use in production. The facilities now being used to produce

Part QS42 have fixed monthly cost of P150,000 and a capacity to produce 84,000 units per

month. If Savage were to buy Part QS42 from an outside supplier, the facilities would be

idle, but its fixed costs would continue at 40% of their present amount. The variable

production costs of Part QS42 are P11 per unit.

If Savage Industries is able to obtain Part QS42 from an outside supplier at a unit purchase
price of P12.875, the monthly usage at which it will be indifferent between purchasing and
making Part QS42 is
A. 30,000 units. B. 32,000 units. C. 80,000 D. 48,000
50. Sta. Elena Company manufactures men’s caps. The projected income statement for the
year before any special order is as follows:
Amount Per Unit
Sales P 400,000 P 20
Cost of goods sold 320,000 16
Gross margin P 80,000 P 4
Selling expenses 30,000 3
Operating income P 50,000 P 1
Fixed costs included in above projected income statement are P80,000 in cost of goods sold

and P9,000 in selling expenses.

A special order offering to buy 2,000 caps for P17 each was made to Sta. Elena. No
additional selling expenses will be incurred if the special order is accepted. Sta. Elena has
 the capacity to manufacture 2,000 more caps.
As a result of the special order, the operating income would increase by
a. P34,000 b. P24,000 c. P10,000 d. P0
51. High Class Townhouse, Inc. manages five upscale townhouse in Makati, Ortigas, and

Greenhills area. Shown below are the summary income statements for each complex:

In Thousand Pesos
One Two Three Four Five
Rent Income 10,000 12,100 23,470 18,780 10,650
Expenses 8,000 13,000 26,000 24,000 13,000
Profit 2,000 (900) (2,530) (5,220) (2,350
Included in the expenses is P12,000,000 of corporate overhead allocated to the townhouse
based on rental income. The complex that the company should consider selling is (are)
a. Three, Four & Five. c. Two, Three, Four & Five.
b. Four & Five. d. Four.
52. Nakinnat Corporation’s Outlet No. 5 reported the following results of operations for the
period just ended:
Sales P2,500,000
Less: Variable expenses 1,000,000
Contribution margin P1,500,000
Less: Fixed expenses
Salaries & wages P 750,000
Insurance on inventories 50,000
Depreciation on equipment 325,000
Advertising 500,000 1,625,000
Net income (loss) (P125,000)
The management is contemplating on dropping outlet No. 5 due to the unfavorable
operational results. If this would happen, one employee will have to be retained with an
annual salary of P150,000. The equipment has no resale value. Outlet No. 5 should
a. Not be dropped due to foregone overall income of P350,000.
b. Be dropped due to foregone overall income of P325,000.
c. Not be dropped due to foregone overall income of P25,000.
d. Be dropped due to overall operational loss of P25,000.
53. JKL Company is considering replacing a machine with a book value of P100,000, a

remaining useful life of 4 years, and annual straight-line depreciation of P25,000. The

existing machine has a current market value of P80,000. The replacement machine would

cost P160,000, have a 4-year useful life, save P50,000 per year in cash operating costs. If the
 replacement machine would be depreciated using straight-line method and the tax rate is

40%, what would be the increases in annual income taxes if the company replaces the

machine?

A. P21,000 B. P14,000 C. P32,000 D. P20,000

54. . Julius International produces weekly 15,000 units of Product JI and 30,000 units of JII for
which P800,000 common variable costs are incurred. These two products can be sold as is
or processed further. Further processing of either product does not delay the production of
subsequent batches of the joint products. Below are some information:
JI JII
Unit selling price without further processing P24 P18
Unit selling price with further processing P30 P22
Total separate weekly variable costs of further P100,000 P90,000
processing
To maximize Julius’ manufacturing contribution margin, the total separate variable costs of
further processing that should be incurred each week are
a. P95,000 b. P90,000 c. P100,000 d. P190,000

55. Motor Company manufactures 10,000 units of Part M-l each year for use in its production.
The following total costs were reported last year:

Direct materials......................................... $ 20,000

Direct labor................................................ 55,000
Variable manufacturing overhead............. 45,000
Fixed manufacturing overhead.................. 70,000
$190,00
Total manufacturing cost.......................... 0

Valve Company has offered to sell Motor 10,000 units of Part M-l for $18 per unit. If
Motor accepts the offer, some of the facilities presently used to manufacture Part M-l
could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit
of the fixed overhead applied to Part M-l would be totally eliminated. Should Motor
Company accept Valve Company's offer, and why?
A) No, because it would be $5,000 cheaper to make the part.
B) Yes, because it would be $10,000 cheaper to buy the part.
C) No, because it would be $15,000 cheaper to make the part.
D) Yes, because it would be $25,000 cheaper to buy the part.

56 Gallerani Corporation has received a request for a special order of 6,000 units of product
A90 for $21.20 each. Product A90's unit product cost is $16.20, determined as follows:

Direct materials......................................... $ 6.10

 Direct labor................................................ 4.20
Variable manufacturing overhead............. 2.30
Fixed manufacturing overhead.................. 3.60
$16.2
Unit product cost....................................... 0

Direct labor is a variable cost. The special order would have no effect on the company's
total fixed manufacturing overhead costs. The customer would like modifications made
to product A90 that would increase the variable costs by $4.20 per unit and that would
require an investment of $21,000 in special molds that would have no salvage value.
This special order would have no effect on the company's other sales. The company has
ample spare capacity for producing the special order. If the special order is accepted,
the company's overall net operating income would increase (decrease) by:
A) ($18,600)
B) ($16,200)
C) $30,000
D) $5,400

57. Holden Company produces three products, with costs and selling prices as follows:

Product A Product B Product C

Selling price per unit................ $30 100% $20 100% $15 100%
Variable costs per unit............. 18 60% 15 75% 6 40%
Contribution margin per unit... $12 40% $5 25% $9 60%

A particular machine is a bottleneck. On that machine, 3 machine hours are required to

produce each unit of Product A, 1 hour is required to produce each unit of Product B,
and 2 hours are required to produce each unit of Product C. In which order should it
produce its products?
A) C, A, B
B) A, C, B
C) B, C, A
D) The order of production doesn't matter.

58. An automated turning machine is the current constraint at Jordison Corporation. Three
products use this constrained resource. Data concerning those products appear below:

LN JQ RQ
$165.8 $313.1 $494.5
Selling price per unit...................... 8 1 2
$118.3 $239.6 $381.4
Variable cost per unit.................... 0 1 2
Minutes on the constraint............. 2.60 4.90 7.80

Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be
 emphasized.
A) LN, JQ, RQ
B) RQ, LN, JQ
C) RQ, JQ, LN
D) JQ, RQ, LN
59. Pendall Company manufactures products Dee and Eff from a joint process. Product Dee has
been allocated $2,500 of the $20,000 in total joint costs associated with the production
of 1,000 units each of Dee and Eff each year. Dee can be sold at the split-off point for $3
per unit, or it can be processed further with additional costs of $1,000 and sold for $5
per unit. If Dee is processed further and sold, the result would be:
A) A break-even situation.
B) An additional gain of $1,000 from further processing.
C) A loss of $1,000 from further processing.
D) An additional gain of $2,000 from further processing.

60. Faustina Chemical Company manufactures three chemicals (TX14, NJ35, and KS63) from a
joint process. The three chemicals are in industrial grade form at the split-off point. They
can either be sold at that point or processed further into premium grade. Costs related
to each batch of this chemical process is as follows:

TX14 NJ35 KS63

$16,00 $12,00 $5,00
Sales value at split-off point...................... 0 0 0
$6,00
Allocated joint costs.................................. $6,000 $6,000 0
$20,00 $18,00 $9,00
Sales value after further processing.......... 0 0 0
$2,00
Cost of further processing......................... $5,000 $3,000 0

For which product(s) above would it be more profitable for Faustina to sell at the split-
off point rather than process further?
A) TX14 only
B) KS63 only
C) TX14 and KS63 only
D) NJ35 and KS63 only
. Use the following to answer questions 61-62

Mcfarlain Corporation is presently making part U98 that is used in one of its products. A total of
7,000 units of this part are produced and used every year. The company's Accounting
Department reports the following costs of producing the part at this level of activity:

Per Unit
Direct materials......................................... $3.70
Direct labor................................................ $3.60
Variable overhead..................................... $1.40
Supervisor’s salary..................................... $4.00
Depreciation of special equipment........... $3.90
Allocated general overhead...................... $4.10

An outside supplier has offered to produce and sell the part to the company for $17.10 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor,
can be avoided. The special equipment used to make the part was purchased many years ago
and has no salvage value or other use. The allocated general overhead represents fixed costs of
the entire company, none of which would be avoided if the part were purchased instead of
produced internally.
61. If management decides to buy part U98 from the outside supplier rather than to
continue making the part, what would be the annual impact on the company's overall net
operating income?
A) Net operating income would decline by $30,800 per year.
B) Net operating income would increase by $25,200 per year.
C) Net operating income would increase by $30,800 per year.
D) Net operating income would decline by $25,200 per year.

62. In addition to the facts given above, assume that the space used to produce part U98
could be used to make more of one of the company's other products, generating an
additional segment margin of $24,000 per year for that product. What would be the
impact on the company's overall net operating income of buying part U98 from the
outside supplier and using the freed space to make more of the other product?
A) Net operating income would decline by $6,800 per year.
B) Net operating income would decline by $1,200 per year.
C) Net operating income would increase by $24,000 per year.
D)©Net oterating income would decline by $49,200 per yeap.
. Use the following to answer questions 63:

The following are Silver Company's unit costs of making and selling an item at a volume of 8,000
units per month (which represents the company's capacity):

Manufacturing:
$
Direct materials.......................... 4
$
Direct labor................................. 5
$
Variable overhead...................... 2
$
Fixed overhead........................... 8
Selling and administrative:
$
Variable...................................... 1
$
Fixed........................................... 6

Present sales amount to 7,000 units per month. An order has been received from a customer in
a foreign market for 1,000 units at a price of $20 per unit. The order would not affect regular
sales. Fixed costs, both manufacturing and selling and administrative, are constant within the
relevant range between 6,000 and 8,000 units per month. The variable selling and
administrative costs would have to be incurred for this special order as well as all other sales.

63. If the company accepts the special order, the effect on total operating income will be a:
A) $1,000 increase
B) $9,000 increase
C) $6,000 decrease
D) $8,000 increase

64. A company is considering an investment of P 400,000 in new machinery. The

machinery is expected to yield incremental profits over the next five years as
follows:

Year Profit
1 P 175,000
2 225,000
3 340,000
4 165,000
5 125,000

Thereafter, no incremental profits are expected and the machinery will be sold.
It is company policy to depreciate machinery on a straight-line basis over the
life of the asset. The machinery is expected to have a value of P50,000 at the
end of year 5.
What is the payback period of the investment in this machinery?
a. 0.9 years
b. 1.3 years
c. 1.5 years
d. 1.9 years

65. VIP Corporation invested in a four-year project. VIP’s cost of capital is 8

percent. Additional information on the project is as follows:
Year Post-tax cash inflow PV of P 1 at 8%
1 P 2,000 0.926
2 2,200 0.857
3 2,400 0.794
4 2,600 0.735
Assuming a net present value of P 2,500, what is the project’s payback period?
a. Between 2 years and 2.5 years
b. Between 2.5 years and 3 years
c. Between 3 years and 3.5 years
d. Between 3.5 years and 4 years

66. Orlando Corporation 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 P400,000
Net annual savings in operating costs 90,000
Salvage value now of the old machine 60,000
Salvage value of the old machine in 8 years 0
Salvage value of the new machine in 8 years 50,000
Estimated life of the new machine 8 years
What is the expected payback period for the new machine?
A. 4.44 years C. 2.67 years
B. 8.50 years D. 3.78 years

67. Zap Manufacturing has an investment opportunity to embark on a project where yearly
revenues for five years are to be P400,000 and operating costs of P104,800. The equipment
costs P1 million, and straight-line depreciation will be used for book and tax purposes. No
salvage value is expected at the end of the project’s life. The company has a 40 percent
marginal tax rate and a 10 percent cost of capital. The equipment manufacturer has offered
a delayed payment plan of P560,500 per year at the end of the first and second years. There
will be no changes in working capital.
The present value of annuity of 1 for 5 periods is 3.7908 at 10 percent.
The present values of 1 end of each period at 10 percent are:
Period 1 0.9091
Period 2 0.8264
Period 3 0.7513
Period 4 0.6830
Period 5 0.6209
The net present value if the equipment were purchased is
A. P (87,977) C. P 1,922
B. P (25,310) D. P (61,094)
68. Kipling Company has invested in a project that has an eight-year life. It is expected that the
annual cash inflow from the project will be P20,000. Assuming that the project has a
internal rate of return of 12%, how much was the initial investment in the project if the
present value of annuity of 1 for 8 periods is 4.968 and the present value of 1 is 0.404?
A. P160,000 C. P 80,800
B. P 99,360 D. P 64,640

69.to 72 The management of Arleen Corporation is considering the purchase of a new machine
costing P400,000. The company’s desired rate of return is 10%. The present value of P1 at
compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621,
respectively, and the present value of annuity of 1 for 5 periods at 10 percent is 3.79. In
addition to the foregoing information, use the following data in determining the acceptability in
this situation:

Year Income from Operations Net Cash Flow

1 P100,000 P180,000
2 40,000 120,000
3 20,000 100,000
4 10,000 90,000
5 10,000 90,000

69. The average rate of return for this investment is:

A. 18 percent C. 58 percent
B. 6 percent D. 10 percent

70. The net present value for this investment is:

A. Positive P 36,400 C. Negative P 99,600
B. Positive P 55,200 D. Negative P126,800

71. The present value index for this investment is:

A. 0.88 C. 1.14
B. 1.45 D. 0.70

72. The cash payback period for this investment is:

A. 4 years C. 20 years
B. 5 years D. 3 years

Use the following information for questions 73 to 75

Pillo Company is considering two capital investment proposals.

Estimates regarding each project are provided below:

Project MA Project PA
Initial investment P2000,000 P300,000
Annual net income 10,000 21,000
Net annual cash inflow 50,000 71,000
Estimated useful life 5 years 6 years
Salvage value -0- -0-
The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Period 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605
6 4.486 4.355 4.231 4.111

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73.The cash payback period for Project MA is
A. 20 years C. 5 years
B. 10 years D. 4 years

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.74. The net present value for Project PA is
A. P309,204 C. P 50,000
B. P 91,456 D. P 9,205

75. The annual rate of return for Project MA is

A. 5% C. 25%
B. 10% D. 50%
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.

G o o d L u c k !!!
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