MAS Review Workbook Suggested Answers Chapter 16-19

CH. 16; CAPITAL BUDGETING CH. 19; ECONOMICS

1 B 21 A 41 C 61 D 81 B 101 C 1 D 22 D 43 C 64 B 85 D 106 C
2 A 22 D 42 D 62 A 82 B 102 B 2 A 23 A 44 B 65 A 86 C 107 D
3 C 23 A 43 A 63 B 83 B 103 C 3 A 24 C 45 B 66 D 87 B 108 B
4 D 24 D 44 A 64 B 84 B 104 D 4 A 25 A 46 A 67 C 88 C 109 B
5 C 25 D 45 A 65 D 85 A 105 C 5 D 26 D 47 A 68 D 89 A 110 A
6 B 26 D 46 E 66 C 86 C 106 B 6 B 27 C 48 A 69 A 90 C 111 D
7 B 27 A 47 B 67 B 87 B 107 B 7 D 28 C 49 B 70 D 91 C 112 D
8 B 28 A 48 A 68 B 88 D 108 B 8 C 29 B 50 A 71 A 92 D 113 A
9 D 29 A 49 D 69 B 89 B 9 C 30 D 51 A 72 D 93 A 114 A
10 B 30 A 50 C 70 E 90 B 10 C 31 A 52 C 73 B 94 C 115 B
11 C 31 D 51 E 71 C 91 B 11 D 32 A 53 A 74 A 95 C 116 A
12 C 32 B 52 A 72 B 92 D 12 A 33 B 54 C 75 B 96 C 117 D
13 B 33 C 53 A 73 D 93 C 13 A 34 D 55 B 76 A 97 D 118 B
14 D 34 D 54 A 74 C 94 C 14 A 35 D 56 C 77 B 98 D 119 D
15 B 35 A 55 A 75 C 95 A 15 B 36 C 57 C 78 A 99 D 120 D
16 C 36 B 56 C 76 A 96 B 16 B 37 B 58 C 79 A 100 C 121 B
17 C 37 D 57 A 77 B 97 B 17 C 38 A 59 D 80 A 101 B 122 B
18 D 38 D 58 D 78 D 98 D 18 D 39 B 60 C 81 A 102 C 123 D
19 A 39 A 59 C 79 C 99 D 19 A 40 A 61 B 82 B 103 D 124 C
20 E 40 C 60 C 80 D 100 C 20 A 41 A 62 D 83 D 104 B 125 A
21 C 42 A 63 A 84 D 105 A 126 C
Ch. 17; FINANCING DECISIONS
1 A 11 D 21 E 31 B 41 E 51 B
2 B 12 D 22 A 32 A 42 D 52 E CH. 16; CB - Suggested Solutions
3 D 13 A 23 D 33 D 43 D 53 C 66 Purchase price 70,000
4 C 14 C 24 E 34 C 44 B 54 B Proceeds from sale (25,000)
5 B 15 C 25 D 35 A 45 D 55 C Tax benefit - loss on sale (P7T x 30%) (2,100)
Net Investment 42,900
6 C 16 D 26 C 36 B 46 B 56 B
7 A 17 D 27 D 37 E 47 C 57 D
67 Purchase price 800,000
8 C 18 D 28 D 38 D 48 D 58 B
Trade in value (60,000)
9 C 19 E 29 E 39 B 49 D
Avoidable repair cost, net of tax
10 C 20 E 30 D 40 D 50 B
(P200T x 65%) (130,000)
Net Investment 610,000
Ch. 18;
QUANTITATIVE TECHNIQUES
68 Purchase price 50,000
1 A 11 B 21 D 31 D 41 D
Freight & installation costs 1,500
2 A 12 D 22 A 32 C 42 B
Working capital requirement 12,000
3 D 13 D 23 A 33 D 43 B
Trade in value (7,500)
4 A 14 B 24 C 34 D 44 B
Sale of old assets (3,000)
5 B 15 C 25 D 35 B 45 C
Tax shield - loss on sale (1T x 40%) (400)
6 D 16 D 26 C 36 D 46 D Avoidable repair cost, net of tax
7 D 17 B 27 B 37 D 47 C (P4T x 60%) (2,400)
8 18 B 28 B 38 C 48 C Net Investment 50,200
9 A 19 D 29 A 39 C 49 D
10 A 20 D 30 B 40 A 50 C
MAS Review Workbook Suggested Answers Chapter 16-19
69 Purchase price 2,250,000 Yr 1 (24,000) 1
Incidental costs 200,000 Yr 2 (30,000) 1
Working Capital (P40T+P160T-P140T) 60,000 Yr 3 (P6T/P36T) (6,000) 0.17
Sales proceeds - old asset (50,000) Balance/Total period 0 2.17
Tax savings - loss on sale (P100T x 35%) (35,000)
Net Investment 2,425,000 Investment cost 60,000 Pd
Ater tax NCI
70 Sales proceeds 18,000 Yr 1 P24T x (1.18)-1 (20,340) 1
Tax on gain on sale (P5T x 30%) (1,500) Yr 2 P30T x (1.18)-2 (21,546) 1
Net cash flow 16,500 Yr 3 P18,114 / [P36T x (1.18)-3] (18,114) 0.8
Balance/Total period 0 2.8
71 Incremental revenue 600,000
Incremental expenses (400,000) 77 Net cash inflow b4 tax 18,000
Net cash inflow b4 tax 200,000 Incremental tax (P18T - P8T) x35% (3,500)
Incremental tax (P200T - P50T) x 30% (45,000) Net cash inflow after tax 14,500
Net cash inflow after tax 155,000 Payback period (P64T / P14,500) 4.40 yrs

72 CM (P50T x 60%) 30,000 78 Net cash inflow b4 tax 135,000

FC (10,000) Incremental tax (P135T - P100T) x 40% (14,000)
Depreciation expense (5,000) Net cash inflow after tax 121,000
Income b4 tax (OI) 15,000
Income tax (40%) (6,000) Investment Cost 500,000
Net income 9,000 Annual NCI 121,000
Depreciation expense 5,000 Payback Period 4.13
Net cash inflow (NCI) 14,000
79 Net investment 5,000
73 Incremental Revenue (P2.9M - P2.4M) 500,000 Annual NCI (P10T x 40%) - P2T 2,000
Incremental Expense (P2.05M - Payback 2.5
P1.85M) (200,000)
Incremental OI 300,000
80 Cost Savings (Cash inflow b4 tax) 190,000
Incremental tax (35%) (105,000)
Depreciation expense (90,000)
Incremental NI 195,000
Operating income (OI) 100,000
Incremental depreciation (P500T-
P350T) 150,000 Income tax (40,000)
Incremental NCI 345,000 Net Income 60,000
Depreciation expense 90,000
74 Incremental revenue 40,000 Annual NCI (P450T/3) 150,000
Incremental expenses (29,000)
Incremental tax (P40T - P29T) x 40% (4,400) 81 Annual NCI 220,000
Net cash inflow after tax 6,600 Investment cost 1,200,000
Net sales, net of tax (P9T x 60%) 5,400 Payback reciprocal 18.33%
Released WC (P7T + P5T) 12,000
Net Cash flow - 10th yr 24,000 82 Annual NCI 120,000
Depreciation (60,000)
75 Net cost savings/yr (P200T-P25T) 175,000 Annual Net income 60,000
PV of 1 at 16% for 10 yrs 4.8332 Investment cost 600,000
PV of savings 845,810 ARR 10%
83 Annual cash savings 65,000
76 Investment cost 60,000 Pd Depreciation (40,000)
Ater tax NCI Annual Net benefit 25,000
MAS Review Workbook Suggested Answers Chapter 16-19
Investment cost 200,000 Net Investment (P50T + P30T) (180,000)
ARR 12.50% NPV 81,589
Difference in answer of P81,600 is due to
84 Annual net savings (P55T-P12T) 43,000 rounding off of PV factors.
Depreciation (P250T/10) (25,000)
Annual Net benefit 18,000 89 Total PV of NCI (P800T x 4.564) 3,651,200
Investment cost (P250T-P10T) 240,000 Investment Cost (squeezed) (3,524,000)
ARR 7.50% NPV 127,200
85 Yr 1 (P600T x .91) 546,000
Yr 2 (P300T x .76) 228,000 90 Yr 1 (P2M x 1.12-1) 1,785,714
Yr 3-5 (P200T x 1.6) 320,000 -2
Yr 2 (P3M x 1.12 ) 2,391,582
Total PV of NCI 1,094,000 Yr 3 (P3M x 1.12-3) 2,135,341
Investment Cost (1,000,000) Yr 4 (P1.5M x 1.12 )-4
953,277
NPV 94,000 Total PV of NCI 7,265,914
Investment Cost (P2M+P3M+P3M/2) (6,500,000)
86 Annual Savings 170,000 NPV 765,914
Depreciation (P320T - P20T) x 30% (90,000)
OI 80,000 91 PV annuity of Annual cash inflows 36,000
Income tax (40%) (32,000) PV annuity of 1 @ 20% for 6 yrs
NI 48,000 [1-(1.2-6)/.2] 3.3255
Depreciation 90,000 Annual cash inflow 10,825
NCI - Year 1 and Year 3 138,000
92 PV of NCI 2,400,000
Annual Savings 170,000 Net Investment 1,200,000
Depreciation (P320T - P20T) x 40% (120,000) Profitability Index (PI) 2
OI 50,000
Income tax (40%) (20,000) 93 Rate NPV Computation NPV
NI 30,000 12% (P145T x 3.6048) 522,696
Depreciation 120,000 IRR 500,000
NCI - Year 1 150,000 14% (P145T x 3.4331) 497,799.5

Yr 1 (P138T x .862) 118,956 IRR must be between 12% and 14%.

Use Interpolation method to get exact rate of 13.80%.
Yr 2 (P150T x .743) 111,450
Yr 3 (P138T x .641) 88,458 94. IRR is where NPV=0 Investment cost =PV of NCI
(P20T x .641) 12,820 P34,055 = P5,000 x [1-(1+r)-15]/r r = 12%
Total NCI 331,684
Net investment (320,000) 95 PV annuity of 1 @20% for 7 yrs 3.6046
NPV 11,684 [1-(1.2-7)/.2]
Annual NCI 40,000
87 PV annuity of annual NCI 76,743 Total PV of NCI = Investment Cost 144,184
[1-(1.2)-8/.2] x P20,000
PV of WC released (1.2-8 x P30T) 6,977 Difference in answer of P144,200 is due to rounding off of
Total PV of NCI 83,720 PV factors.
Investment Cost (80,000)
NPV 3,720
88 PV annuity NCI P60T x [ (1-1.14-8)/.14] 278,332 96 PV of NCI 371,120
SV (P10T x 1.14 ) -8
3,506 PV annuity of 1 @ 14% for 8 yrs
Overhaul cost (P30T x 1.14-3) (20,249) 1-(1.14-8)/.14 4.6389
Total PV of NCI 261,589 Annual Cash Inflow 80,002
MAS Review Workbook Suggested Answers Chapter 16-19
97 P22,820 = P5,000 x [1-(1.12-n)/.12]
.45232 = 1.12-n n=7
106 Year 1 (P100T x 1.103) 133,100
98 Investment cost 281,670
[(1-(1.14-10) / .14] x P54,000 Year 2 (P200T x 1.102) 242,000
Annual NCI 54,000 Year 3 (P200T x 1.101) 220,000
Payback Period 5.22
Total Future Value 595,100
99 At 10%
Yr 1 (1.1-1) x P150T 136,364
Yr 2 (1.1-2) x P200T 165,289 PV Cash Outflows = FV of NCI
Yr 3 (1.1-3) x P250T 187,829
P300T + (P100T x 1.10-4)= (1+r)-4 x (P595,100)
Yr 4 (1.1-4) x P400T 273,205
Yr 5 (1.1-5) x P100T 62,093 r = 12.745%
Total PV of NCI 824,780
Investment Cost (Squeezed) (700,000) 107 Difference in Cash Flows
NPV 124,780 Investment cost 100,000
Cash Inflows
Use Trial and Error Method to arrive at NPV=0. Yr 1 25,000
IRR = 16.38% Yr 2 25,000
Yr 3 30,000
100 Project PI Rank Yr 4 50,000
1 1.5 3
2 1.4 4 Use trial and error to find the rate which when used to
3 1.8 1 discount the cash inflows, will result to P100,000, the cost
4 1.6 2 of investment. Thus, where difference in NPV=0
Profitability Index (PI) = PV CI/Investment Cost
Rate = 10.03%

108 First Payment 25,000

101 all projects with NPV > P0 or PI > 100%
Next Payments (1-(1.14)-7/.14) x P25T 107,208
102 Order of Priority is from highest to lowest PI. Total PV Payments 132,208
In case of tie, use NPV and then IRR as last option.
Difference in answer of P132,200 is due to rounding off of
PV factors.
103 Using PV index, order of Priority is C,B,A.
Funds Available 900,000
Priority 1 - Project C (380,000)
Priority 2 - Project B (470,000)
Balance 50,000
Balance can no longer support project A.
Thus, only Projects C & B can be pursued.

104 IRR is where Investment cost = PV NCI

P200T= P44,500 (PV Annuity)
4.49408= PV Annuity = ((1-(1+r)-10)/r) r = 18%

105 MIRR is where PV of cash outflows = PV of FV NCI

P275T = (1+r)-8 [(1.12)8 -1)/12) x P73,306]

P275T = (1+r)-8 x P901,641 r = 16%