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    Capital Budgeting Exercises 2 NUNEZ PDF

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    Alexis King
    1) The payback period for replacing equipment costing $60,000 that yields $50,000 annual savings is 1.2 years. The accounting rate of return is 41.67% using original investment and 33.33% using average investment. 2) The payback period for a $90,000 investment yielding uneven cash flows is 30 months. The book rate of return is 20%. 3) For a $640,000 investment with $128,000 annual cash inflow over 30 years, the payback reciprocal is 20%.

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    Capital Budgeting Exercises 2 NUNEZ PDF

    Uploaded by

    Alexis King
    117 views3 pages
    1) The payback period for replacing equipment costing $60,000 that yields $50,000 annual savings is 1.2 years. The accounting rate of return is 41.67% using original investment and 33.33% using average investment. 2) The payback period for a $90,000 investment yielding uneven cash flows is 30 months. The book rate of return is 20%. 3) For a $640,000 investment with $128,000 annual cash inflow over 30 years, the payback reciprocal is 20%.

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    1) The payback period for replacing equipment costing $60,000 that yields $50,000 annual savings is 1.2 years. The accounting rate of return is 41.67% using original investment and 33.33% using average investment. 2) The payback period for a $90,000 investment yielding uneven cash flows is 30 months. The book rate of return is 20%. 3) For a $640,000 investment with $128,000 annual cash inflow over 30 years, the payback reciprocal is 20%.

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    117 views3 pages

    Capital Budgeting Exercises 2 NUNEZ PDF

    Uploaded by

    Alexis King
    1) The payback period for replacing equipment costing $60,000 that yields $50,000 annual savings is 1.2 years. The accounting rate of return is 41.67% using original investment and 33.33% using average investment. 2) The payback period for a $90,000 investment yielding uneven cash flows is 30 months. The book rate of return is 20%. 3) For a $640,000 investment with $128,000 annual cash inflow over 30 years, the payback reciprocal is 20%.

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    of 3

    Management Science - Capital Budgeting Exercises

    Nam: Nicelle Nicole Noreen Nuñez Yr. & Block: BSA2-C

    1. Payback Period and Accounting Rate of Return (with even cash flows)

    The Knights Company considers the replacement of some old equipment. The cost of the new equipment is P60,000,
    with a useful life estimate of 6 years and no salvage value. The annual cash savings from the use of the new equipment is
    P50,000. The old equipment has zero market value and is fully depreciated. The tax rate is 30% and the company uses a
    cost of capital of 20%.
    Required: a. Payback period and b. accounting rate of return based on:
    (1) Original investment (2) average investment

    2. Payback Period and ARR (with uneven cash flows)

    The Templar Company has an investment opportunity costing P90,000 that is expected to yield the following cash
    flows over the next five years: (assume a cut-off rate of 25%)
    Year 1 – P40,000; 2 – P35,000; 3- P30,000; 4 – P20,000; 5 – P10,000; total – P135,000.
    Required:
    a. Payback period in months.
    b. Book rate of return on investment.

    3. Payback Reciprocal

    Sophie is planning to buy an equipment costing P640,000 that has an estimated life of 30 years and is expected to
    produce after-tax net cash inflows of P128,000 per year.
    Required: Compute the payback reciprocal.
    1. Payback Period and Accounting Rate of Return (with even cash flows)

    A. Payback Period

    Net investment P 60,000


    Annual cash returns 50,000
    Salvage Value 0
    Useful life 6 years

    Solution:

    Payback period = 60,000/50,000 = 1.2 years

    B. Accounting Rate of Return

    (1) Original Investment (2) Average Investment

    60,000/6yrs = 10,000 60,000/6yrs = 10,000

    Tax expense = Annual cash inflow x tax rate Tax expense = Annual cash inflow x tax rate
    = 50,000 x 30% = 50,000 x 30%
    = 15,000 = 15,000

    Annual Cash inflow - Tax expense Annual Cash inflow - Tax expense
    = 50,000 - 15,000 = 50,000 - 15,000
    = 35,000 = 35,000

    ARR = (35,000 - 10,000) / 60,000 ARR = (35,000 - 10,000) / (60,000 + 0/2)


    = 41.67% = 83.33%

    2.Payback Period and ARR (with uneven cash flows)

    A. Payback period in months

    Net Investment P 90,000


    Annual cash returns:
    Year 1 40,000
    Year 2 35,000
    Year 3 30,000
    Year 4 20,000
    Year 5 10,000

    Payback Period (in months)= 2 yrs + (90,000 - 75,000) / 30,000 x 1


    = 2.5 years x 12
    = 30 months

    B. Book rate of return on investment

    Net Investment P 90,000 Book rate of return = (27,000 - 18,000) / (90,000/2)


    Annual cash returns: = 20%
    Year 1 40,000
    Year 2 35,000
    Year 3 30,000
    Year 4 20,000
    Year 5 10,000
    Total 135,000

    (135,000 / 5) = 27,000 Depreciation=(90,000/5)= 18,000


    3.Payback Reciprocal

    Net investment P 640,000


    Annual cash inflow 128,000
    Useful life 30 years

    Payback Period = 640,000/128,000


    = 5 years

    Payback Reciprocal = 1/5


    = 20%

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