Solution manual management advisory services by agamata chapter 14

This Accounting Materials are brought to you by www.everything.freelahat.com CHAPTER 14 CAPITAL BUDGETING [Problem 1] Purchase price Trade-in allowance Saving from repairs Additional tax on savings (P25,000 x 40%) Net cost of investment for decision analysis P140,000 ( 7,000) ( 25,000) 10,000 P118,000 [Problem 2] Purchase price P4,800,000 Freight and installation 45,000 Trade-in allowance ( 200,000) Salvage value of other assets 12,000 Tax savings – other assets ( 8,000) Savings from repairs ( 400,000) Add’l tax on savings from repairs (P400,000 x 40%) 160,000 Additional working capital 350,000 Net cost of investment for decision analysis P4,759,000 [Problem 3] Purchase price Freight charge Installation costs Special attachment Add’l working capital Proceeds from sale of old assets Tax savings (P38,000 x 25%) Savings from repairs P900,000 25,000 22,000 55,000 110,000 ( 22,000) ( 9,500) ( 120,000) Add’l tax on savings from repairs (P120,000 x 25%) 30,000 Net cost of investment for decision analysis P990,500 [Problem 4] Furnishing and equipment Rental deposits Accounts receivable (P9M x 1/3 x 2/3) Inventory Cash Net cost of investment for decision analysis P 500,000 200,000 2,000 000 400,000 120,000 P5,020,000 This Accounting Materials are brought to you by www.everything.freelahat.com [Problem 5] Sales Materials Labor Factory overhead Selling and administrative expenses Depreciation expense (P1,200,000  yrs) Income before income tax Tax (30%) Net income Add back: Depreciation expense Annual net cash flows P6,000,000 ( 800,000) ( 1,200,000) ( 540,000) ( 700,000) ( 240,000) 2,520,000 ( 756,000) 1,764,000 240,000 P2,004,000 [Problem 6] Weighted Average Cost of Capital (WACOC) = ? Sources of capital Market values Individual Cost of Capital Capital Mix WACOC Fraction Mortgage bonds (P300,000 x 105%) = P315,000 (10% x 55%) = 5.5% Preferred equity (2000 sh x P96) = 192,000 (P12 / P96) = 12.5 192 / 1.007 2.38% Common equity (50,000 sh x P10) = 500,000 P1.50 / P10 = 15.0 500 / 1.007 7.45% Total 315 / 1.007 P1,007,000 11.55% Preferred dividends = 12% x P100 = P12 / sh Earnings per share = P75,000 / 50,000 sh = P1.50 Proposed Investment A B C ROI 7% 10% 14% WACOC 11.55% 11.55% 11.55% 1.72% Advise Reject Reject Accept Investments are to be accepted if the WACOC is higher than the ROI This Accounting Materials are brought to you by www.everything.freelahat.com [Problem 7] New WACOC = ? Cost of Sources of Money Long-term debt Preferred equity Common equity Package Capital 6% Amount Amount 3% P 2,000 000 3,000,000 1.65% 14% Total 7,000,000 4.90% P20,000,000 WACOC P10,000,000 11% Package 9.55% Package WACOC 11,000 000 7,000, 000 P20,000,000 Amount WACOC 0.60% P 6,000,000 1.80% 6.05% 5,000,000 2.75% 4.90% 9,000,000 11.55% P20,000,000 6.30% 10.85% Package gives the invest WACOC at 9.55% [Problem 8] Before Bonds Retirement Amount Bonds Preferred equity Common equity WACOC WACOC P 5,000,000 (8% x 60% x 5/10) = 2.4% 1,000,000 (9% x 1/10) 4,000,000 (12.5% x 4/10) Lease Totals After Bonds Retirement Amount P10,000,000 P4,000,000 (8% x 60% x 4/10) = 1.92% 1,0 = 0.9% 00,000 (9% x 1/10) = 0.90% 4,0 = 5% 00,000 (12.5% x 4/10) = 5.0% 1, 000,000 10% x 60% x 1/10) = 0.60% P 8.30% 10,000,000 8.42% [Problem 9] a WACOC = ? Funds Mortgage bonds Common stock Ret earnings Total Amount P20,000,000 25,000,000 55,000,000 P100,000,000 Individual Cost of Capital WACOC [(6.5% x 50%) / 95%] 3.42% 0.684% [(P4 x 105%) /P94 + 5%] 9.47 2.3675% 9.47 5.2085% 8.26% b The weighted average cost of capital is used as a benchmark in evaluating the acceptability or rejection of proposed investment because it measures the point of expected return where the minimum required return of each class of investor is met by reason of cross-subsidizing from one class of security to another [Problem 10] This Accounting Materials are brought to you by www.everything.freelahat.com a WACOC under each alternative Debt Equity WACOC b Alternative A (9% x 50% x 2/6) = 1.5% {[(P1/P20) + 7%] x 4/6} = 8.0% 9.5% Alternative B (12% x 50% x 4/6) = 4.0% {[(P0.90/P20) + 12%] x 2/6} = 5.5% 9.5% In alternative B, the amount of debt increases thereby increasing the debt equity ratio signalling the firm is highly leveraged and more risky for investment This tends to increase the nominal rate of the bonds c Yes; it is logical for stockholders to expect a higher dividend growth rate under alternative B to compensate the higher rate implied by an increase in the debt exposure of the firm and to validate the theory that the more debt is used in the financing portfolio, the higher the profitability rate of the firm, thereby, the higher the growth rate [Problem 11] Marginal Cost of Capital for each fund WACOC = ? Capital Mix [b] Sources Rate WACOC Mortgage bonds 15.00% 1.26% Debentures 25.00% 2.175% Preferred stock 10.00% 1.36% Common stock 16.67% 2.11% (P1.80 / P67.50 + 10%)=12.67% Retained earnings 33.33% 4.22% = 12.67% 100.00% 11.125% Maximum point of expansion for retained earnings: Net income (P4.50 x 15 million shares) P67,500,000 Common dividends (P67,000,000 x 40% or P1.80 x 15 million) ( 27,000,000) Preferred stock dividends ( 6,750,000) Retained earnings available for expansion P33,750,000 Common equity = 50% of total capitalization Maximum point of expansion before common stock shares are issued = P33,750,000 / 50% = P67.5M [a] Individual COC (14% x60%) = 8.4% (145% x 60%) = 8.7% (P13.50/ P99.25) = 13.60% This Accounting Materials are brought to you by www.everything.freelahat.com The WACOC varies among firms in the industry even if the basic business risk is similar for all firms in the industry This is true because each firm selects the degree of financial leverage it desires This financial leverage affects the capital mix structure of a firm that affects the determination of the weighted average cost of capital [Problem 12] WACOC before and after bond retirement: [1] Before Bond Retirement Capital Amount [2] After Bond retirement WACOC Amount Lease WACOC P1,000,000 (10% x 60% x 1/10) = 0.6% 8% Debentures 9% Preferred stock P5,000,000 8% x 60% x 5/10) = 2.4% 4,000,000 (8% 60% x 4/10) = 1.92% 1,000,000 (9% x 1/10) = 0.9% 1,000,000 {same} 0.9% Common stock Retained earnings 2,000,000 (13% x 2/10) = 2.6% 2,000,000 {same} 2.6% 2,000,000 (13% x 2/10) = 2.4% 2,000,000 {same} 2.4% 8.30% P10,000,000 8.42% P10,000,000 The component costs and the weighting used to calculate the WACOC in a-1 is different in a-2 because P1 M of debentures are replaced by lease which is more expensive (from 8% to 10% nominal rate) This brings up the WACOC to 8.42% Market values should be used in calculating the WACOC because COC calculation is used to estimate the current marginal cost of capital for the company The use of market values a recognizes the current investor attitudes regarding the company’s risk position and will reflect current rates for capital b recognizes better the capital proportions the company must consider in the capital sources decision; and c ignores the influence of past values which are not relevant to future decision [Problem 13] The board member’s agreement is incorrect because the facts seem to indicate that Kia Corporation’s capitalization is not in optimum mix (i.e., equilibrium) The issuance of new debt will increase the financial leverage of the firm, increases the risk, increases the note’s nominal rate, and decreases the earnings multiple While the marginal cost of capital is a combination of explicit interest cost on the notes and the additional cost of earnings that must occur to compensate the common This Accounting Materials are brought to you by www.everything.freelahat.com stockholders for the decline in the earnings multiple The 14% return in this project should be compared with the new weighted average cost of capital if the issuance of note is undertaken New level of annual earnings of the earnings multiple declines to =? Present market price per share = 10(P2.70) = P27.00 Required EPS (new) = P27/9 = P3.00 Required earnings before tax (P3.00 x 10,000,000 shares / 50%) P 60,000,000 Interest expense [(P10 M x 8%) + (P50M x 10%)] 5,800,000 Required earnings before interest and taxes 65,800,000 Less: Old earnings before interest and taxes {[(P2.70 x 10,000,000 shares) / 50%] + P800,000} 54,800,000 Additional earnings before interest and taxes P 11,000,000 Additional informational analysis: If the earnings multiple declines to 9, the additional earnings provided by the new assets to maintain the same market price per share of P27 shall be: X = additional earnings (new P/E) (new EPS) = P27 ( P2.70 + X) = P27 2.70 + X = P3 X = P0.30 [Problem14] Breaks = ? Breaks or increases in weighted marginal cost of capital will recur as follows: For Debt = Debt / Debt Ratio = P100,000 / 40% = P250,000 For Equity = Equity / Equity Ratio = P150,000 / 60% = P350,000 WACOC = ? a Before the break (P1 – P250,000 amount of financing) i Debt = 7% x 40% = 3.2% ii Equity = 18% x 60% = 10.8% iii WACOC 14.0% b After the break (P250,001 – above amount of financing) Debt = 10% x 40% = 4.0% Equity = 22% x 60% = 13.2% WACOC 17.2% This Accounting Materials are brought to you by www.everything.freelahat.com Graph of marginal cost of capital (MCC) schedule and investment opportunities schedule (IOC): 26 24 IRR ( ) 22 A MCC ( ) 20 18 B MCC 16 14 12 C 10 100 200 225 300 400 450 500 (new financing, thousands of pesos) Projects are to be accepted as long as the IRR is greater than the MCC Projects A and B are acceptable; based on the following: Project A B C IRR 19% 15% 12% MCC 14% 14% 17.20% Advise Accept Accept Reject [Problem15] EPS and market price per share = ? a Raise P100,000 by issuing 10-year, 12% bonds Case Sales P 400,000 - Costs and operating expenses (90%) 360,000 EBIT 40,000 -Interest charges [P2,000 + (12% x P100,000)] 14,000 IBIT 26,000 - Tax (50%) 13,000 Net Income P 13,000 P1.30 Earnings per share Case P 600,000 540,000 60,000 Case P 800,000 720,000 80,000 14,000 46,000 23,000 P 23,000 P2.30 14,000 66,000 33,000 P 33,000 P3.30 This Accounting Materials are brought to you by www.everything.freelahat.com (NI / 10,000 shares) Price / earnings rates Market price per share EPS (old) = P36 / 12 = No of shares = P30,000 / P3 = b 10x P13 10x P23 10x P33 Case P 400,000 360,000 40,000 2,000 38,000 19,000 P 19,000 Case P 600,000 540,000 60,000 2,000 58,000 29,000 P 29,000 Case P 800,000 720,000 80,000 2,000 78,000 39,000 P 39,000 P1.46 12x P17.52 P2.23 12x P26.76 P3.00 12x P36 13,000 13,000 13,000 10,000 sh Raise P100,000 by issuing new column stock Sales - Costs and D Exp (90%) EBIT -Interest expense IBIT - Tax (50%) Net Income Earnings per share (NI / 13,000Shares) Price / earnings rates Market price per share No of shares (P100,000 / P33.33 + 10,000) Recommended proposal = ? The recommendation shall be based on the following criteria:  Brief desorption of the criteria  The proposal chosen Wealth Maximization  Wealth maximization is primordial among shareholders in as much as this is the end objective of business This wealth maximization principle is represented by the market price per share  The total sales of the firm should be higher than P600,000, since its sales last year was already at P600,000 At this level and more, the Profit Maximization  Profit maximization is a short-run strategy to satisfy the interest of shareholders This profit maximization strategy is best represented by the earnings per share This Accounting Materials are brought to you by www.everything.freelahat.com market price per share is higher by issuing a new share of stock Wealth maximization is a strategic reason of managing a business, hence, at guides organization in its longterm decisions, such as financing decision No, the financing package chosen would be the same The higher the level of sales in excess of P600,000, the more favorable it is on the part of the business! The investment banker would rationalize that issuance of more debt securities would mean a greater variability in earnings and higher risk of bankruptcy created by the fixed commitment to pay debt interest and principal This would bring restrain by diminishing the earnings multiple to compensate the increased risk in leverage [Problem 16] Sales P600,000 Out-of-pocket costs ( 450,000) Depreciation expense (P500,000/5) ( 100,000) IBIT 50,000 Tax (40%) ( 20,000) Net income 30,000 Depreciation expense 100,000 Annual cash inflows P130,000 Payback period = P500,000 / P130,000 = 3.85 yrs 25.97% 6% 12% Payback reciprocal ARR (original) ARR (average) = / 3.85 = P30,000/P500,000 = [P30,000 / (P500,000/2)[ [Problem 17] Year Annual Cash Income, Net of Tax Cash to Date Payback Period = = = This Accounting Materials are brought to you by www.everything.freelahat.com P 70,000 90,000 85,000 160,000 Total P 70,000 160,000 245,000 400,000 1 0.97 3.97 (155,000/160,000) yrs [Problem 18] Net Cash Cash to Inflows Date P300,000 P300,000 400,000 700,000 200,000 900,000 150,000 1,000,000 Year Salvage Total Value Cash P200,000 P500,000 100,00 800,000 50,000 950,000 20,000 1,000,000 Total Payback Period 1 0.53 3.53 [Problem 19] Cash flows before tax Depreciation expense (P1,000,000/ 10) IBIT Tax (40%) Net income ARR (original) = P60,000 / P1 million = ARR (average) = [P60,000 / (P1 million/2)] = (100,000 - 20,000 150,000 yrs P200,000 ( 100,000) 100,000 ( 40,000) P 60,000 6% 12% [Problem 20] Sales P4,000,000 Out-of-pocket costs ( 3,100,000) Depreciation expense [(P2M x 80%)/5] ( 320,000) IBIT 580,000 Tax (40%) ( 232,000) Net income 348,000 Add: Depreciation expense 320,000 Annual net cash inflows P 668,000 Payback period = P million / P668,000 = 2.99 yrs Payback reciprocal = / 2.99 = 33.44% Payback bailout period = [(P4 4M x 80%) / P668,000] = 4.79 yrs ARR (original) = P348,000 / P4 M = 8.7% ARR (average) = [(P348,000 / (P4 M + P800,000) / 2] = 14.5% This Accounting Materials are brought to you by www.everything.freelahat.com [Problem 21] Cash flows before tax - Tax [(P15,000 – P5,000) 40%] Cash flows after tax Payback period (P40,000 / P11,000) P15,000 4,000 P11,000 3.64 yrs Cash flows after tax P11,000 Less: Depreciation expense 5,000 Net income P 6,000 ARR (original) = P6,000 / P40,000 = 15% [Problem 22] PVCI: Annual cash inflows (P300,000 x 3.127) P938,100 Salvage value (P20,000 x 0.437) 8,740 P946,840 Less: COI 800,000 Net present value P146,840 Profitability index = P946,840 / P800,000 = 1.184 NPV index = P146,840 / P800,000 = 0.184 [Problem 23] Year SV Annual Cash PVF at 12% PVCI Inflows P350,000 0.893 P312,550 250,000 0.797 199,250 150,000 0.712 106,800 100,000 0.636 63,600 50,000 0.567 28,350 30,000 0.567 17,010 Total 727,560 Less: Cost of investment 600,000 Net present value P 127,560 Profitability index = (P727,560/P600,000) = 1.21 NPV index = P127,560 / P600,000 = 0.21 [Problem 24] This Accounting Materials are brought to you by www.everything.freelahat.com PVF at Year 14% Proj Proj Proj 0.877 P2,104,800 P4,823,500 P175,400 0.769 1,691,800 1,999,400 461,400 0.675 1,215,000 472,500 675,000 0.592 651,200 118,400 473,600 SV 0.592 118,400 118,400 47,360 Total PVCI P5,781,200 P7,532,200 P1,832,760 COI P5,000,000 P8,000,000 P1,400,000 Profitability index 1.16 0.94 1.31 The company should make investments on the following projects: Rank Proj P 1,400,000 Rank Proj 5,000,000 Total investment P 6,400,000 [Problem25] Annual cash inflows: (P500,000 x 3.889) (P400,000 x 3.889) Salvage value (P100,000 x 0.456) Recovery of working capital (P200,000 x 0.456) (P1,400,000 x 0.456) Total PV of cash inflows Less: COI (P1,400,000 + P200,000) (P200,000 + P1,400,000) Net present value Profitability index (PVCI / COI) Produce Wooden Toy Distribute an Imported Product P 1,944,500 P 1,555,600 45,600 91,200 638,400 2,194,000 2,081,300 1,600,000 P 481,300 1.30 P 1,600,000 594,000 1.37 The net advantage of investing in distributing an imported product is P112,700 (i.e., P534,000 – P481,300) This Accounting Materials are brought to you by www.everything.freelahat.com {Problem 26] Year Project X Project Y Cash to Cash to PVFC 14% PVCI PVCI Date Date 0.887 P 1,754,000 P 1,754,000 P 3,069,500 P 3,069,500 0.769 1,538,000 3,292,000 1,922,500 4,992,000 0.675 1,350,000 4,642,000 1,012,500 5,000,000 0.592 1,184,000 5,000,000 Payback period – Proj X Payback period – Proj Y [3 yrs + (P358,000/P1,184,000)] 3.30 yrs [2 yrs + (P8,000/P1,012,500)] 2.01 yrs [Problem 27] a PVF Annuity = b P520,000 = 2.6 P200,000 Using Table (PVFA Table), the IRR is computed as follows: 18% 2.690 ? 2.600 0.090 2% 0.102 0.012 20% IRR = 18% [Problem 28] a PVF Annuity = 2.588 + 0.090 x 2% 0.102 P800,000 P234,000 * = 19.75% = 3.419 * (P234,000 = [(Total cash inflows + SV)  5] b Using Table 2, the PVF of 3.419 is between 14% and 16% b.1 Using 16% and 18% discount rates we have: PVCI @ 16% Year Cash Inflows P 350,000 300,000 250,000 150,000 80,000 PVF 0.862 P 0.743 0.641 0.552 0.476 Amount 301,700 222,900 160,250 82,800 38,080 PVCI @ 18% PVF 0.847 P 0.718 0.609 0.516 0.437 Amount 296,450 215,400 152,250 77,400 34,960 This Accounting Materials are brought to you by www.everything.freelahat.com SV Totals b.2 40,000 0.476 19,040 824,770 P 0.437 P 17,480 793,940 Since the cost of investment of P800,000 is found the present value of cash inflows (PVCI) of 16% and 18%, then by interpolation, the IRR, could be determined as: Discount rate 16% PVCI P824,770 ? 800,000 24,770 2% 30,830 6,060 18% IRR = 16% 793,940 + 24,770 x 2% 30,830 = 17.61% [Problem 29] PV of cash dividends (1,400 shares x P20 x 3.791) PV of stock sales (P200,000 x 0.621) PV of the shares of stock Less: Cost of the share of stock Net present value P106,148 124,200 230,348 203,000 P 27,348 a) P203,00 P230,000 = = 2.988 {[(1,400 x P20) x + P200,000] + 5} P68,000 Using Table (PVFA Table), we have: PV Annuity b) = 20% 2.991 0.006 2% 2.985 ? 22% IRR [Problem 30] = 20% 0.127 0.121 2.864 + 0.006 0.127 x 2% = 20.09% This Accounting Materials are brought to you by www.everything.freelahat.com Background analysis: Cash savings before depreciation (P138,600 - P91,300) P47,300 Less: Depreciation expense 20,000 Income before income tax 27,300 Less: Tax (40%) 10,920 Net Income 16,380 Add: Depreciation expense 20,000 Annual Cash Inflows P36,380 Payback period = P160,000/P36380 = 4.40 yrs Payback reciprocal = 1/.P4.40 = 22.73% ARR (original) = P16,380/P160,000 = 10.24% ARR (average) = P16,380/(P160,000/2) = 20.48% PVCI (P36,380 x 5.747) P209,076 Less: Cost of Investment 160,000 Net Present Value P 49,076 Profitability index = P209,076/P160,000 = 1.31 NPV index = P49,076/P160,000 = 0.31 a PVF annuity = P160,000/P36,380 = 4.398 b Using Table 2, we have: 14% 4.639 ? 4.398 0.241 2% 0.295 0.054 16% IRR = 14% 4.344 + 0.241 0.295 x 2% = 15.63% [Problem 31] Depreciation Expense Year SY P3.2M 2.4M 1.6M 0.8M Tax Effect PV of Tax PVF at SL 8% Savings P(444,480 P2.0M P1.2M P(480,000) 0.926 ) 2.0M 0.4M (160,000) 0.857 (137,120) 2.0M (0.4M) 160,000 0.794 127,040 2.0M (1.2M) 480,000 0.735 352,800 This Accounting Materials are brought to you by www.everything.freelahat.com Total P101,760 [Problem 32] Cash Net Cash Flows Straight Line Method (P2,400,000 P1,430,000) Sum-of-theyears-digit method 1.a b Inflows Before Dep Tax Expense IBIT Tax (30%) Net Dep After Income Expense Tax P970,000 P360,000 P610,000 P183,000 P427,000 P360,000 Year P970,000 640,000 330,000 99,000 231,000 640,000 871,000 Year P970,000 560,000 410,000 123,000 287,000 560,000 847,000 Year P970,000 480,000 490,000 147,000 343,000 480,000 823,000 Year P970,000 400,000 570,000 171,000 399,000 400,000 799,000 Year P970,000 320,000 650,000 195,000 455,000 320,000 775,000 Year P970,000 240,000 730,000 219,000 511,000 240,000 751,000 Year P970,000 160,000 810,000 243,000 567,000 160,000 727,000 Year P970,000 80,000 890,000 267,000 623,000 80,000 703,000 Annual cash inflows after tax: Alternately, cash inflows after tax may be computed by deducting the corresponding income tax from the cash flows before tax The tax expense equals cash flows before tax less depreciation expense Net present values, straight-line method and SYD method PVCI: Regular(P787,000 x 5.747) Y1 (P871,000 x 0.926) Y2 (P847,000 x 0.857) Y3 (P823,000 X 0.794) Y4 (P799,000 X 0.735) Y5 (P775,000 X 0.681) Y6 (P751,000 X 0.630) Y7 (P727,000 X 0.583) Y8 (P703,000 X 0.540) SV (P120,000 X 0.540) Straight-line P4,523,889 64,800 SYD P806,546 725,879 653,462 587,265 527,775 473,130 423,841 379,620 64,800 P787,000 This Accounting Materials are brought to you by www.everything.freelahat.com Recovery of working capital (P400,000 x 0.540) Cost of investment(P3M + P400,000) Net present value 216,000 (3,40 0,000) P1,403.689 Advantage of the SYD method 216,000 (3,400,000) P1,458,328 P 54,639 The tax benefit using SYD method instead of the straight-line method is P54,639 (i.e., P1,458,328 - P1,403,689) [Problem 33] Purchase price PV of lease payments (P30,000 x 5.650) PV of salvage value (P200,000 x 0.322/64,400) PV of tax savings on depreciation expense (P200,00 x 35% x 5.650) PV of tax savings on lease payments (P300,000 x 35% x 4.65) PV of relevant costs Buy P2,200,000 ( 64,400) ( 395,500) P1,740,100 Net Advantage of leasing PV of annual savings (P638,350/5.65) Lease P1,695,000 ( 64,400) ( 93,250) P1,101,750 P638,350 P112,982 [Problem 34] Payback period = P35,000/P10,000 = 3.5 yrs PVCI (P10,000 x 3.785) Less: Cost of investment Net present value Amount of investment six years ago P37,850 35,000 P 2,850 = = = P35,000 Future Value Factor @ 15%, n = P35,000 2.313 P15.132 [Problem 35] PV of cash dividends (20,000 shares x P4 x 3.605) P288,400 PV of stock sales (P500,000 x 115% x 0.567) 326,025 PV of shares of stock 614,425 This Accounting Materials are brought to you by www.everything.freelahat.com Less: cost of investment Net present value – common stock 500,000 P114,425 PV of interest receipts (P500,000 x 14% x 3.605) PV of bond redemption (P500,000 x 150% x 0.567) PV of bonds Less: Cost of investment Net present value – bonds P252,350 425,250 677,600 500,000 P177,600 The investment in bonds is more advantageous by P63,175 (i.e., P177,600 – P114,425) than the investment in stock [Problem 36] Cost of investment Less: Present values of inflows: Y1 (P120,000 x 0.893) Y2 (P240,000 x 0.797) Y3 (P360,000 x 0.712) Present value of year inflows  PVFC 12%, year Cash inflows, year P681,960 (107,160) (191,280) (256,320) 127,200 0.636 P200,000 PV of savings (P700,000 x 5.197) Less: Cost of investment Net present value of intangible benefits PVF Annuity = P1,027,750 = 4.11* P250,000 P3,637,900 3,000,000 P 637,900 *Using table 2, 4.11 at 12% = yrs [Problem 37] Savings from labor and materials Increase in maintenance (P6,000 x 12) Annual cash savings PVCI Regular cash (P784,000 x 3.433) Salvage value (P180,000 x 0.579) Y1 - Y3 P 820,000 Y4 - Y5 P 820,000 (72,000) P 784,000 (72,000) P 784,000 P2,567,884 93,420 P2,661,304 This Accounting Materials are brought to you by www.everything.freelahat.com Less: Cost of investment (P2,700,000 – P70,000) Net present value P 2,630,000 (31,304) Annual cash savings Depreciation expense P Y1 - Y3 748,000 Y4 - Y5 P 748,000 (504,000 ) P2,700,000 - P180,000 yrs [P504,000 + (P150,000/2)] Income before income tax Less: Tax (40%) Net income Add: Depreciation expense Annual cash inflows P 244,000 97,600 146,400 504,000 650,400 (579,000 ) 169,000 67,600 101,400 579,000 P 680,400 PVCI Y1 – Y3 (P650,400 x 2.322) P1,510,229 Y4 (P680,400 x 0.592) 402,797 Y5 (P680,400 x 0.519) 353,128 Salvage value – new (P150,000 x 0.519) 77,850 Less: Cost of investment (P2,700,000 – P70,000 Net present value P2,344,004 2,630,000 P (285,996) [Problem 38] Make Buy Relevant cost to buy / make Year (50,000 x P22 x 0.893) 982,300 P 1,294,850 (50,000 x P29 x 0.893) Year (50,000 x P22 x 0.797) P 876,700 1,155,650 (50,000 x P29 x 0.797) Year (52,000 x P22 x 0.712) 814,528 1,032,400 (50,000 x P29 x 0.712) Year (55,000 x P22 x 0.636) 769,560 1,014,400 (55,000 x P29 x 0.636) Year (55,000 x P22 x 0.567) 686,070 904,365 (55,000 x P29 x 0.567) Avoidable fixed overhead (P45,000 x 3.605) 162,225 Salvage value - old asset (1,500) Salvage value - new (P12,000 x 0.567) (6,804) Tax savings on depreciation expense This Accounting Materials are brought to you by www.everything.freelahat.com Year (P384,000 x 40% x 9.893) (137,165) Year (P230,400 x 40% x 0.797) (73,452) Year (P138,240 x 40% x 0.712) (39,371) Year (P82,944 x 40% x 0.636) (21,101) Year (P 124,416 x 40% x 0.567) (28,218) PV of relevant costs - yrs P 3,883,772 P Net advantage of making in yrs P 1,517,913 5,401,685 Some of the non-financial and qualitative factors to be considered before deciding whether to make or buy a part are: a Availability of materials from supplier b Stability of prices of material c Quality of parts to be supplied d Dependability of past supplier e Impact of new technology [Problem 39] Increase in direct materials [(P4.50 – P3.80) x 80,000] Decrease in direct labor and variable overhead (P1.60 x 80,000) Net operating cash savings before tax P (56,000) 128,000 P 72,000 Years Cash savings before tax P72,000 P72,000 P72,000 P72,000 P72,000 Less: Depreciation expense using SYD 800,000 640,000 480,000 320,000 160,000 Income before income tax (728,000) (568,000) (408,000) Less: Tax (40%) (291,200) (227,200) (163,200) Net income (loss) (436,800) (340,800) (244,800) Add: Depreciation expense Annual cash inflows 800,000 P363,200 640,000 P299,200 480,000 P235,200 (248,000) (99,200) (148,800) 320,000 P171,200 Regular operating cash inflows (P363,200 + P299,200 + P235,200 + P171,200 + P107,200) Salvage value (P100,000 x 60%) Total cash inflows Less: Cost of investment Net cash inflows P 1,176,000 60,000 1,236,000 2,500,000 P(1,264,000) (88,000) (35,200) (52,800) 160,000 P107,200 This Accounting Materials are brought to you by www.everything.freelahat.com Zero, there is no excess of after tax cash inflows over the cost of initial investment because the total cash inflow is even lower than the cost of investment  ... P33,750,000 / 50% = P67.5M [a] Individual COC (14% x60%) = 8.4% (145 % x 60%) = 8.7% (P13.50/ P99.25) = 13.60% This Accounting Materials are brought to you by www.everything.freelahat.com The WACOC... following: Project A B C IRR 19% 15% 12% MCC 14% 14% 17.20% Advise Accept Accept Reject [Problem15] EPS and market price per share = ? a Raise P100,000 by issuing 10-year, 12% bonds Case Sales P... P100,000)] 14, 000 IBIT 26,000 - Tax (50%) 13,000 Net Income P 13,000 P1.30 Earnings per share Case P 600,000 540,000 60,000 Case P 800,000 720,000 80,000 14, 000 46,000 23,000 P 23,000 P2.30 14, 000