Name:____________________________ Score:__________________________

Block/Course/Year:_________________ Date:___________________________

MANAGEMENT ACCTG PART II

MIDTERM 1ST QUIZ
THEORIES: Write the letter of your answer beside the space provided for each number.

1. Which of the following combinations is NOT possible?

Profitability Index NPV IRR

A. Greater than 1 Positive More than cost of capital

B. Equals 1 Zero Equals cost of capital

C. Less than 1 Negative Less than cost of capital

D. Less than 1 Positive Less than cost of capital

2. You have determined the profitability of a planned project by finding the present value of
all the cash flows from that project. Which of the following would cause the project to
look less appealing, that is, have a lower present value?
A. The discount rate increases.
B. The cash flows are extended over a longer period of time.

C. The investment cost decreases without affecting the expected income and life of
the project.
D. The cash flows are accelerated and the project life is correspondingly shortened.

3. The normal methods of analyzing investments

A. cannot be used by not-for-profit entities.
B. do not apply if the project will not produce revenues.
C. cannot be used if the company plans to finance the project with funds already
available internally.
D. require forecasts of cash flows expected from the project.
4. The proper treatment of an investment in receivables and inventory is to
A. ignore it
B. add it to the required investment in fixed assets
C. add it to the required investment in fixed assets and subtract it from the annual
cash flows
D. add it to the investment in fixed assets and add the present value of the recovery
to the present value of the annual cash flows

5. Which of the following is always true with regard to the net present value (NPV)
approach?
A. If a project is found to be acceptable under the NPV approach, it would also
be acceptable under the internal rate of return (IRR) approach.
B. The NPV and the IRR approaches will always rank projects in the same
order.
 C. If a project is found to be acceptable under the NPV approach, it would also
be acceptable under the payback approach.
D. The NPV and payback approaches will always rank projects in the same
order.

6. Several proposed capital projects which are economically acceptable may have to be
ranked due to constraints in financial resources. In ranking these projects, the least
pertinent is this statement.
A. If the internal rate of return method is used in the capital rationing problem,
the higher the rate, the better the project.
B. In selecting the required rate of return, one may either calculate the
organizations cost of capital or use a rate generally acceptable in the
industry.
C. A ranking procedure on the basis of quantitative criteria may be established
by specifying a minimum desired rate of return, which rate is used in
calculating the net present value of each project.
D. If the net present value method is used, the profitability index is calculated to
rank the projects. The lower the index, the better the project.

7. 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?
A. $10,154 B. $13,200 C. $57,200 D. $33,846

8. A proposed project has normal cash flows. In other words, there is an up-front cost
followed over time by a series of positive cash flows. The projects internal rate of return
is 12 percent and its WACC is 10 percent. Which of the following statements is most
correct? (E)
a. The projects NPV is positive.
b. The projects MIRR is greater than 10 percent but less than 12 percent.
c. The projects payback period is greater than its discounted payback period.
d. Statements a and b are correct.

9. The technique used to evaluate all possible capital projects of different dollar amounts
and then rank them according to their desirability is the (M)
a. Profitability index method. c. Payback method.
b. Net present value method. d. Discounted cash flow method.

10. What is the effect of changes in cash inflows, investment cost and cash outflows on
profitability (present value) index (PI)
A. PI will increase with an increase in cash inflows, a decrease in investment
cost, or a decrease in cash outflows.
B. PI will increase with an increase in cash inflows, an increase in investment
cost, or an increase in cash outflows.
C. PI will decrease with an increase in cash inflows, a decrease in investment
cost, or a decrease in cash outflows.
D. PI will decrease with an increase in cash outflows, an increase in investment
cost, or an increase in cash inflows.
PROBLEMS: Encircle your final answers. Show your solutions.
1. Lester Mendoza Ramos Corp. is considering purchasing new machinery. The summarized
portion of the income statement of the corporation is as follows:
Sales 1,200,000
Cost of Sales (480,000)
Gross Profit 720,000
Operating Expenses (500,000)
Operating Income 220,000
The new machinery is going to improve the quality of the goods manufactured and the company
can then increase the selling price the 8 pesos. In addition, it will also reduce the cash operating
expenses by 50,000. The company sells 150,000 units of its product annually.
The new machinery has a purchase price of 1,500,000. The freight to deliver the machinery is
200,000 with terms FOB shipping point. It has a salvage value of 200,000 and a useful life of 10
years. If the applicable tax rate for the company is 30% and the salvage value is not considered
in computing the depreciation, find the following:
a. Average rate of return
b. Annual net cash returns
c. Payback period

2. Yung Hermit Crab Co. has a beta coefficient of 1.1, a risk-free rate of 6% and a current rate of
return of 8%
The following information are disclosed to you relating to its investment to a new project:

Annual Cash Net

Year Returns Income

1 20,000 10,000

2 18,000 10,000

3 21,000 15,000

4 23,000 19,000

5 25,000 23,000

The net investment for the new project ins P400,000. The company uses SYD in computing the
depreciation. Find the following:
a. Net present value
b. Accounting rate of return based on average investment
c. Discounted Payback period

3. Inuyashiki Company is considering the acceptability of two independent projects:

Project 1: Buy an asset for P200,000 with no salvage value and has a useful life of 10
years. The annual net income of the project is P120,000.
Project 2: Buy an asset for P120,000 with 0 salvage value and has a useful life of 5
years. The asset will decrease costs by P20,000 annually.
The hurdle rate is 15%.
a. If you are given the chance to recommend, which project will you choose?
b. IRR for Project 1
c. IRR for Project 2
d. Profitability Index for Project 1
e. Profitability Index for Project 2
4. Zosimo Corporation is studying whether it is more beneficial for the company to obtain a new
machinery or to repair the old one. Below are the implications of choosing the alternative:
BUY: The machine will cost P2,000,000. Installation cost of the new machine will be
P130,000 and the working capital will increase by P60,000. The company will repair the
old machine for P15,000 before selling it for P915,000. The new machine will provide
cost reduction amounting to 250,000 annually. The useful life and salvage value are 10
and 0 respectively.
REPAIR: The machine was bought 5 years ago for P1750,000 and is 50% depreciated.
The salvage value is P5,000. The repair cost will amount to P15,000.
Find the following:
a. Simple rate of return on the buy option
b. Accounting rate of return based on initial investment on the buy option
c. Net investment if the company decided to buy the equipment.
d. Is it more beneficial to buy a new machine or to repair the old one?

5. You were asked to assess an investment based on its payback period and bail-out period. The
following information were disclosed to you:
Annual Cash Returns on Salvage Net
Year Operations Value Investment

1 100,000 100,000 1,000,000

2 300,000 80,000

3 100,000 60,000

4 400,000 40,000

5 100,000 20,000

a. What is the projects payback period?

b. What is the projects bail-out period?
c. Using 12% as the hurdle rate, what is the discounted payback period?