GUAGUA NATIONAL COLLEGES

Guagua, Pampanga

Name: __________________________________ Date: _____________

Year & Section: ___________________________

Instructions: Read each question carefully and put your answer on the space provided before the number.

1. 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.

2. In equipment-replacement decisions, which one of the following does not affect the decision-making process?
A. current disposal price of the old equipment
B. operating costs of the new equipment
C. original fair market value of the old equipment
D. cost of the new equipment

3. The term that refers to costs incurred in the past that are not relevant to a future decision is
A. discretionary cost C. under-allocated indirect cost
B. full absorption cost D. sunk cost

4. A company has a cost of capital of 15% and is considering the acquisition of a new machine which costs
P400,000 and has a useful life of 5 years. The company projects that earnings and cash flow will increase as
follows:

Year Net Earnings After-tax Cash Flow

1 P100,000 P160,000
2 100,000 140,000
3 100,000 100,000
4 100,000 100,000
5 200,000 100,000

15% Interest Rate Factors

Period Present Value of P1 Present Value of an
Ordinary Annuity of P1
1 0.87 0.87
2 0.76 1.63
3 0.66 2.29
4 0.57 2.86
5 0.50 3.36

The net present value of this investment is

A. negative, P64,000 C. positive, P18,600
B. negative, P14,000 D. positive, P200,000

5. The net present value of a proposed investment is negative; therefore, the discount rate used must be
A. greater than the project’s internal rate of return
B. less than the project’s internal rate of return
C. greater than the firm’s cost of equity
D. less than the risk-free rate.

6. The internal rate of return (IRR) is the

A. hurdle rate
B. rate of interest for which the net present value is greater than 1.0
C. rate of interest for which the net present value is equal to zero
D. rate of return generated from the operational cash flows
 Items 7-10 are based on the following information.

A corporation is considering the acquisition of a new machine. The machine can be purchased for P100,000;
it will cost P4,000 to install and P7,000 to transport to the corporation’s plant. It is estimated that the machine
will last 10 years, and it is expected to be worth P4,000 after it is fully depreciated. Over its 10-year life, the
machine is expected to produce 3,000 units per year with a selling price of P300 and combined material and
labor costs of P250 per unit. Tax regulations permit machines of this type to be depreciated using straight-
line method over seven years with no consideration for salvage value. The company has a marginal tax rate of
30%.

7. What is the net cash outflow at the beginning of the first year that the corporation should use in a capital
budgeting analysis?
A. P100,000 C. P111,000
B. P107,000 D. P97,500

8. How much depreciation should the company include in the calculation of after-tax cash flow in its capital
budgeting analysis for year 2?
A. P15,857 C. P11,500
B. P13,059 D. P11,100

9. What is the net cash flow for the second year that the company should use in a capital budgeting analysis?
A. P150,000 C. P134,143
B. P109,757 D. P40,243

10. What is the net cash flow for Year 10 of the project that the company should use in a capital budgeting
analysis?
A. P105,000 C. P109,800
B. P107,800 D. P109,000

For items 11-18, use the basic equation for the capital asset pricing model (CAPM). (2 points each)

a. Find the required rate of return for an asset with a beta of 1.10 when the risk-free rate and market
return are 8% and 10%, respectively.
b. Find the required rate of return for an asset with a beta of 1.20 when the risk-free rate of return is
7%, and the market risk premium is 3%.
c. Find the risk-free rate for an asset with a beta of 1.20 and the required return of 10% when the
market risk premium is 3%.
d. Find the beta for an asset with a required return of 8.6% when the risk-free rate and market return
are 5% and 8%, respectively.

19. ABC Company has a payback goal of 3 years on new equipment acquisitions. A new sorter is being evaluated
that costs P450,000 and has a 5-year life. Straight-line depreciation will be used; no salvage value is anticipated.
ABC is subject to 40% income tax rate. To meet the company’s payback goal, the sorter must generate
reductions in annual cash operating costs of
A. P60,000 C. P150,000
B. P100,000 D. P190,000

20. When evaluating projects, break-even time is best described as

A. Annual fixed costs ÷ monthly contribution margin
B. Project investment ÷ annual net cash inflows
C. The point where cumulative cash inflows on a project equal total cash outflows.
D. The point at which discounted cumulative cash inflows on a project equal discounted total cash outflows.

21. The discounted cash flow model is considered the best for long-term decisions. Which of the following are
discounted cash flow models?
I. Net present value II. Internal rate of return III. Profitability index

A. I, II, and III C. I and II

B. I and II D. II and II
22. A corporation purchased equipment for P46,000. The salvage value of the equipment is P6,000. Pertinent
information follows:

Year Net Cash Flows Present Value Factor

1 P9,000 0.943
2 15,000 0.841
3 19,000 0.776
4 25,000 0.719

What is the discounted payback period in years?

A. 3.484 years C. 3.692 years
B. 3.217 years D. 3.564 years

Items 23-24 are based on the following information.

A company manufactures three main products, X, Y, and Z, and a by-product BP from a common input in
a joint processing operation. Joint processing costs up to the split-off point total ₱100,000 per month. The
company allocates these costs to the joint products based on their relative sales value at the split-off point.
Unit selling prices and total output at the split-off point are as follows:

Product Selling Price Monthly Output

X P16 per kilo 15,000 kilos
Y 8 per kilo 20,000 kilos
Z 25 per kilo 4,000 kilos

Each product can be processed further after the split-off point. Additional processing requires no special
facilities. The additional processing costs (per month) and unit selling prices after further processing are given
below:

Product Additional Processing Selling Price

Costs
X P65,000 P20 per kilo
Y 90,000 P13 per kilo
Z 20,000 P32 per kilo

23. Which product(s) should be sold at split-off point?

A. Product X C. Product Z
B. Product Y D. Products Y and Z

24. Which product(s) should be processed further?

A. Product X C. Product Z
B. Product Y D. Products Y and Z

Items 25-26 are based on the following information.

Paper Products, Inc., produces bond paper and onion skin. The manufacturing process is highly mechanized;
both products are produced in the same machinery by using different settings. For the coming period, 400,000
machine hours are available. Management is trying to decide on the quantities of each product to produce.
The following data are available. Units are expressed in reams.

Bond Paper Onion Skin

Machine hours per ream 2 1
Unit selling price P250 P200
Unit variable cost P150 P180

Because of market conditions, the company can sell no more than 150,000 reams of bond paper and 300,000
reams of onion skin.

25. How many reams of bond paper should the company produce?
A. 100,000 C. 200,000
B. 150,000 D. 250,000
26. How many reams of onion skin should the company produce?
A. 100,000 C. 200,000
B. 150,000 D. 250,000

27. A firm produces Product A. The total costs (TC) for this product can be estimated by the equation:

Product A TC = P600,000 + P30x

Where x = sales volume in units

The firm believes that there is a 30% chance for the sales volume of Product A to equal 20,000 units and a
70% chance that it will be equal to 50,000 units. The selling price of Product A is P50. What is the expected
profit from Product A?
A. P200,000 C. P220,000
B. P210,000 D. P230,000

Items 28-30 are based on the following information.

XY Company has two products, Product A and Product B, that it manufactures through its production
facilities. The contribution margin for Product A is ₱20 per unit, whereas Product B’s contribution margin is
₱30 per unit. Each product uses Materials X and Y. Product A uses 3 kilos of Material X, and Product B
uses 6 kilos. Product A requires 6 feet of Material X and Product B uses 4 feet.

The company can only purchase 300 kilos of Material X and 480 feet of Material Y.

Required: Formulate the objective function and all of the constraints in order to maximize contribution
margin. (3 points)