Operating Cash Inflow

Operating cash inflow
1. The Lakers Company is interested in buying a piece of equipment that is

needs. The following data assembled concerning this equipment:
Cost of required equipment
P250,000
Working capital required
P100,000
Annual operating cash inflow
80,000
Cash repair at end of 4 years
40,000
Salvage value at end of 6 years
90,000
This equipment is expected to have a useful life of 6 years. At the end of the
sixth year the working capital is 10%. Use the net present value method to answer
the following question.
The PV of all future operating cash inflow is

a.
b.
c.
d.
P617,280
P45,120
P348,400
P278,710
Answer: C.
Annual Operating Cash Inflow
X Present Value of 1 in 6 periods
Present Value of Operating Cash Inflow
P 80,000
4,355
P348,400
2. The Jackson Company has invested in a machine that cost P70,00, that has a
useful life of seven years, and that has no salvage value at the end of its
useful life. The machine is being depreciated by the straight-line method,
based on its useful life. It will have payback period of four years. Given these
data, the simple rate of return (to the nearest tenth of a percent) on the
machine will be (ignore taxes)
a. 7.1%
b. 8.2%
c. 10.7%
d. 39.3%
Answer: C.
Investment Cost
P70,000
Divided by Payback Period

Annual Cash Inflow
4
17,500
Less: Depreciation (P70,000/ 7yrs.)

Income
Divided by Investment
Simple Rate of Returns
10,000
7,500
70,000
10.7%
3. A project required an initial investment of P70,000 and has a profitability

index of 1.141. the present value of the future cash inflow from this
investment is
a. P61,350
b. P68,920
c. P75,210
d. P79,870
Answer: D
Present Value of Investment
X Profitability Index
Present Value of Future Cash Inflow
P70,00
1.141
P79,870
4. Consideration is being given to the possible purchase of a P30,000 machine

for Alo, which is expected to result in a decrease of P12,000 per year in cash
operating expenses. This machine, which has no residual value, has an
estimated useful life of five years and will be depreciated on a straight-line
basis. (ignore income taxes)
a. 12%
b. 20%
c. 30%
d. 40%
Answer: B
Annual Savings
P12,000
Less: Depreciation (P30,000/5)
6,000
Increment Income
6,000
30,000
Simple Rate of Return
20%
5. The Habagat, inc. is planning to spend P600,000 for a machine that it will
depreciate on a straight line basis over a ten year period with no terminal
disposal price. The machine will generate cash flow from operations of
P120,000 a year. Ignoring income taxes, what is the accounting rate of
returns on the net investment ?
a. 5%
b. 10%
c. 12%
d. 15%
Answer: C
Annual Cash Flow
P120,000
Less: Depreciation (P600,000/10)
60,000
Accounting Net Income
60,000
Accounting Rate of Return
600,000
10%
6. The Yates Company purchased a piece of equipment which is expected to

have a useful life of 7 years with no salvage value at the end of the 7-year
period. This equipment is expected to generate a cash inflow of P32,000 each
year of its useful life. If this investment has a time-adjusted rate of return of
14%, then the initial cost of the equipment is
a. P150,000
b. P137,216
c. P12,800
d. P343,360
Answer: B
Annual Cash Inflow
Present Value of an Annuity of 1 in 7 periods
Initial cost of the Equipment (PV of ACI)
P32,000
4.288
P137,216
7. A firm must choose between leasing a new asset or purchasing it with funds
from a term loan. Under the purchase option, the firm will pay five equal
principal payments of P1,000 each and 6% interest on the unpaid balance.
Principal and interest are due at the each year for five years. Alternatively,
the firm can lease the asset for five years at an annual rental cost of P1,400
with payments due at the beginning of each year. The corporate tax rate is
35% and the appropriate after-tax cost of capital is 12%.
Which of the following is closest to the present value of the after-tax cost of
leasing the new asset?
a.
b.
c.
d.
P3,674
P3,779
P3,849
3,992
Answer: A
[P1,400 X 0.65 + (P1,400 X 0.65) (3.037)] = P3,674
8. Duke University has a small shuttle bus that is in poor mechanical condition.
The bus can be either overhaul now or replaced with a new shuttle bus. The
following data have been gathered concerning this two alternatives:
Present Bus
New Bus
Purchased cost new
P32,000
Remaining book value

Major repair needed now
21,000
9,000
Annual cash operating costs

Salvage value now
P40,000
12,000
8,000
10,000
Salvage value seven years from now
2,000
5,000
The university could continue to use the present bus for the next seven years. If the
new bus is purchased, it will be used for the next 7 years and then traded in for
another bus. The university uses a discount rate of 12% and the total cost approach
to net present value analysis in evaluating its investment decisions.
If the new bus is purchased, the present value of all cash flows that occur now is
a.
b.
c.
d.
(P4,000)
(P9,000)
(P21,000)
(P30,000)
Answer: D
Purchase cost (New Bus)
P40,000
Salvage Value (Present Bus)
10,000
Present Value All Cash Flows Occurring Now
P30,000
9. The Ralph Company is considering buying a new machine which will require a
initial outlay of P15,000. The company estimated that over the next four
years the machine would save P6,000 per year in cash operating expenses.
At the end of four years, the machine would have no salvage value. The
companys cost of capital is 14%. The net present value of this investment is
a. (P12632)
b. P17,484
c. P2,484
d. P3,612
Answer: C
Present value of cash inflow (P6,000 x 2.914)
P17,484
Less: Net Investment
15,000
Net Present Value of Investment
P 2,484
10.The president of Trial Company is considering a proposal by the factory
manager for the purchase of a machine for P44,000, the useful life would be
eight years with no residual scrap value. The use of the machine will produce
a positive annual cash flow of P10,000 a year for eight years. An annuity
table shows the present value of P1 received annually for eight years and
discounted at 12% is 4.968. the net present value of the proposal, discounted
at 12% is:
a. P5,680 positive
b. Zero
c. P2,186 negative
d. P2,186 positive
Answer: A
Present Value of Cash Inflows (P10,000 x 4.968)
Less: Cost of Investment
Net Present Value
Net Initial Investment
44,000
P 5,680
P49,680
1. Diliman Republic Publishers, Inc. is considering replacing an old press that

cost P800,000 six years ago with a new one that would cost P2,250,000.
Shipping and installation would cost an additional P200,000. The old press
has a book value of P150,000 and could be sold currently for P50,000. The
increased production of the new press would increase inventories by P40,000,
accounts receivable by P160,000 and accounts payable by P140,000. Diliman
Republics net investment for analyzing the acquisition of the new press
assuming a 35% income tax rate would be
a. P2,450,000
b. P2,425,000
c. P2,600,000
d. P2,250,000
Answer: B
Purchase Price
Add: Shipping Cost
Total Cost
Add: Tax Savings
P2,250,000
200,000
2,450,000
35,000
2,485,000
Less: Increase in Working Capital

Net Initial Investment
60,000
P2,425,000
2. Verb, Inc., is considering a project that would have a ten-year life and would
require a P1,000,000 investment in equipment would have no salvage value.
The project would provide net income each year as follows:
Sales. P2,000,000
Less: variable expenses.
1,400,000
Contribution margin..
600,000
Less fixed expenses
400,000
Net income.. P200,000

All of the above items, except for depreciation of P100,000 a year, represent cash
flows. The depreciation is included in the fixed expenses. The companys required
rate of return is 12%.
What is the projects net present value?
a. P650,000
b. P695,000
c. P1,300,000
d. P700,000
Answer: B
Net income
Depreciation
Net annual cash flow
Years
Initial investment
now
P(1,000,000)
net annual cash flows
1,695,000
net present value
Amount
12% factor
P(1,000,000)
1-10
300,000
present value
1,000
5,650
P
695,000
3. Chum Companys required rate of return is 14%. The company has an

opportunity to be the exclusive distribution of a very popular consumer item.
No new equipment would be needed, but the company would have to use
one-fourth of the in a warehouse it owns. The warehouse cost P200,000 new.
The warehouse is currently half-empty and there are no other plans to use the
empty space. In addition, the company would have the distributorship for
only 5 years. The distributorship would generate a P17,000 net annual cash
inflow. Ignore income taxes.
The net present value of the project at a discount rate of 14% is
a. P12,111
b. P143,077
c. P210,261
d. P10,261
Answer: D
Year
Present Value
Working Capital Investment
Annual cash flows
Working capital released
Net Present value
1-5
5
Amount
now P(100,000) 1.000

17,000 3.433
100,000 0.519
14% Factor
P(100,000)
58,361
51,900
P10,261
4. Andres Company is considering the purchase of a machine that promises to

reduce operating cost 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
saving promised by the machine is
a. P25,000
b. P50,000
c. P35,000
d. P20,000
Answer: A
Investment required / Net annual cash inflow = Factor of the internal rate of return
P83,150/net annual cash inflow = 3.326
P83,150 / 3.326 = net annual cash inflow
= P25,000
5. Information about a company Sweetie Company is considering follows:
Investment
P300,000
Revenue
P190,000
Variable costs
P50,000
Fixed out-of-pocket costs
P25,000
Weighted average cost of capital
8%
Tax rate
40%
The property is considered 5-year property for tax purposes. The company
plans to dispose of the property at the end of the third year. Salvage value at the
time is expected to be P60,000. Assume all cash flows occur at the end of the year
(round to the nearest pesos). Sweeties after-tax cash inflow from disposal is
a.
b.
c.
d.
P82,080
P84,000
P86,250
P93,060
Answer: A
Salvage value
Book value
(P300,000-P60,000-P96,000-P28,800*)
Loss
*Depreciation for one-half year is taken in the year of disposal
Tax savings = P55,200 x 40% = P22,080
Net cash flow at disposal = P60,000 + P22,080 = P82,080
6. Evergreen has an investment opportunity costing P300,000 that is expected

to yield the following cash flows over the next six years:
Year One
P570,00
Year Two
P90,000
Year Three P115,000
Year Four
P130,000
Year Five
P100,000
Year Six
P90,000
The net present value of the investment at a cutoff rate of 10% is
a.
b.
c.
d.
P130,000
P62,100
P88,750
P50,766
Answer: A
Cash
1
2
3
4
5
6
75,000
90,000
115,000
130,000
100,000
90,000
Investment
NPV
Factor
0.909
0.826
0.751
0.683
0.621
0.564
PV
68,175
74,340
86,365
88,365
62,100
50,760
430,530
300,000
130,530
7. Crashdown Co. has the opportunity to introduce a new product. Crashdown

expects the project to sell for P40 and to have per-unit variable costs of P25
and annual cash fixed costs of P2,500,000. Expected annual sales volume is
250,000 units. The equipment needed to bring out the new product costs
P3,500,000, has a four-year life and no salvage value, and would be
depreciated on a straight-line basis. Crashdowns cutoff rates is 12% and its
income tax rate is 40%. What is the increase in annual after-tax cash flows for
this opportunity?
a. P900,000
b. P1,100,000
c. P875,000
d. P1,000,000
Answer: B
Income before taxes [P250,000 x (P40 P25)
- P2,500,000 P3,500,000 /4]
P375,000
Income tax
Net income
Depreciation
Net Cash flow
(150,000)
P225,000
875,000
P1,100,000
8. Consideration is being given to the possible purchase of a P20,000 machine

for Maxi Company, which is expected to result in a decrease of P10,000 per
year in cash operating expenses. This machine, which has no residual value,
has an estimated useful life of five years and will be depreciated on a
straight-line basis. (ignore income taxes)
a. 1.67 years
b. 2.00 years
c. 4.17 years
d. 5,00 years
Answer: B
Investment
P30,000
Divided by Annual Cash Returns
12,000
Payback Period
2.00 yrs.
9. Rano Co. has the opportunity to invest in a two-year project which is
expected to produced cash flows from operation, net of income taxes, of
P100,000 in the first year and P200,000 in the second year. Rano has a cost
of capital of 20%. For this project, Rano should be willing to invest
immediately a maximum of
a. P283,300
b. P249,900
c. P222,100
d. P208,200
Answer: C
P100,000 x 0.833 =P 833,000
P100,000 x 0.694 =P 138,800
P222,100
10.Verb, Inc., is considering a project that would have a ten-year life and would
require a P1,000,000 investment in equipment would have no salvage value.
The project would provide net income each year as follows:
Sales. P2,000,000
Less: variable expenses.
1,400,000
Contribution margin..
600,000
Less fixed expenses
400,000
Net income.. P200,000

All of the above items, except for depreciation of P100,000 a year, represent cash
flows. The depreciation is included in the fixed expenses. What is the projects
internal rate of return? (Interpolate to the nearest tenth of a percent.)
a.
b.
c.
d.
25.5%
23.78%
27.3%
12.5%
Answer: C
P1,000,000 / P300,000 = 3.333
26% factor
true factor
28% factor
3.465
3.333
3.465
3.269
0.132
26% + 2% (0.312 / 0.916) = 27.3%
0.196

Operating Cash Inflow

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Operating Cash Inflow

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Operating cash inflow

1. The Lakers Company is interested in buying a piece of equipment that is

Working capital required

Annual operating cash inflow

Cash repair at end of 4 years

Salvage value at end of 6 years

The PV of all future operating cash inflow is

Divided by Payback Period

Less: Depreciation (P70,000/ 7yrs.)

3. A project required an initial investment of P70,000 and has a profitability

4. Consideration is being given to the possible purchase of a P30,000 machine

Less: Depreciation (P30,000/5)

Simple Rate of Return

Less: Depreciation (P600,000/10)

Accounting Net Income

6. The Yates Company purchased a piece of equipment which is expected to

Remaining book value

Annual cash operating costs

Salvage value seven years from now

Salvage Value (Present Bus)

Present Value All Cash Flows Occurring Now

Net Initial Investment

1. Diliman Republic Publishers, Inc. is considering replacing an old press that

Less: Increase in Working Capital

Less fixed expenses

Net income.. P200,000

3. Chum Companys required rate of return is 14%. The company has an

now P(100,000) 1.000

4. Andres Company is considering the purchase of a machine that promises to

6. Evergreen has an investment opportunity costing P300,000 that is expected

7. Crashdown Co. has the opportunity to introduce a new product. Crashdown

8. Consideration is being given to the possible purchase of a P20,000 machine

Less fixed expenses

Net income.. P200,000

26% + 2% (0.312 / 0.916) = 27.3%

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