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2-13. BA-FM 21P Intro to Financial Management > Chapter 2: Capital Budgeting/Investment Decisions > Flashcards

Chapter 2: Capital Budgeting/Investment Decisions Flashcards

1
Q

3 Financing Coverage

A
  1. Investment Decision
  2. Financing Decision
  3. Dividend Decision
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2
Q

May be defined as decision-making, firms evaluate purchased of major-fixed assets (building, machinery and equipment). To determine required return from a project.

A

Capital Budgeting

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3
Q

Significance of Capital Budgeting

A
  1. Long term effects
  2. Timing the availability of Capital assets
  3. Quality of capital assets
  4. Raising funds
  5. Ability to compete
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4
Q

Some Difficulties in Capital Budgeting

A
  1. Measurement problem
  2. Uncertainty
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5
Q

Project classifications

A
  1. Mandatory investment
  2. Replacement
  3. Expansion project
  4. Diversification project
  5. Research & Development projects
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6
Q

Capital budgeting evaluation techniques

A
  1. non-discounting methods
  2. Discounting method
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7
Q

Non-discounting methods

A
  1. Urgency
  2. Payback period
  3. Accountng rate of return
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8
Q

Discounting methods

A
  1. Net Present Value
  2. Profitability Index
  3. Internal Rate of return
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9
Q

It refer to the length of period required to recover the cost of investment

A

Payback period

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10
Q

Formula of Payback period

A

Intial cost of investment / Annual cash inflow

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11
Q

Find Payback Period

Given:
Year 0 = 5,000,000
Year 1 = 2,000,000
Year 2 = 2,500,000
Year 3 = 3,500,000
Year 4 = 2,000,000
Year 5 = 2,000,000

A

Year 1 = 2,000,000 = 1
Year 2 = 2,500,000 = 1
Year 3 = (5,0000,000 - 4,500,000) / 3,500,000 = 0.14

PP = 2.14 years

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12
Q

Find Payback Period

Given:
Intial Capital = 3,000,000
Year 1 = 1,200,000
Year 2 = 1,200,000
Year 3 = 1,200,000
Year 4 = 1,200,000
Year 5 = 1,200,000

A

Year 1 = 1,200,000 = 1
year 2 = 1,200,000 = 1
Year 3 = (3,000,000-2,400,000) / 1,200,000 = 0.5

PP =. 2.50 years

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13
Q

Find Payback Period

Given:
Intial Capital = 30,000,000
Year (1-5) = 5,000,000 per year
Year (6-10) = 6,000,000 per year

A

Year 1 - 5 = 25,000,000 (5M x 5 years) = 5
Year 6 = 5,000,000 / 6,000,000. = 0.83

PP = 5.83 years

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14
Q

Formula of Accounting rate of return (ARR)

A

Average income after tax / Initial cost of investment

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15
Q

Formula of Net Present Value

A

Present Value - Cash outflow

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16
Q

Formula of Profitability Index

A

Present value of cash inflow (PVCI) / Initial cost of investment

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17
Q

Find Payback Period

Given:
Intial Capital = 800,000
Year 1 = 300,000
Year 2 = 350,000
Year 3 = 450,000
Year 4 = 500,000
Year 5 = 800,000

A

Year 1 = 300,000 = 1
Year 2 = 350,000 = 1

Year 3 = (800K- 300K - 350K) / 450,000 = 0.33

Answer = 2.33 years

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18
Q

Find Net Present Value

Given:
Intial Capital = 800,000
Year 1 = 300,000
Year 2 = 350,000
Year 3 = 450,000
Year 4 = 500,000
Year 5 = 800,000

Rate = 8%

A

Year 1 = 300,000 x 0.9259 = 277,770
Year 2 = 350,000 x 0.8573 = 300,055
Year 3= 450,000 x 0.7938 = 330, 210
Year 4 = 500,000 x 0.7350 = 367,500
Year 5 = 800,000 x 0.6806 = 544,480

(PVCI) 1,820,015 - (PVCO) 800,000
NPV = 1,020,015

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19
Q

Find Profitability Index

Given:
Intial Capital = 800,000
Year 1 = 300,000
Year 2 = 350,000
Year 3 = 450,000
Year 4 = 500,000
Year 5 = 800,000

A

notebook

20
Q

Find Discounted Payback Period

Given:
Intial Capital = 800,000
Year 1 = 300,000
Year 2 = 350,000
Year 3 = 450,000
Year 4 = 500,000
Year 5 = 800,000

A

Notebook

21
Q

Solve the missing numbers (found in notebook)

A

Notebook

22
Q

Find Accounting Rate of Return

Initial Investment = 1,500,000
Income Tax = 273,000 (Year 1)
448,000 (Year 2)

A

ARR = ((273,000 + 448,000) / 2) / 1,500,000

= 24.03%

23
Q

Find Internal rate of Return

Given:
Intial Capital = 800,000
Year 1 = 300,000
Year 2 = 350,000
Year 3 = 450,000
Year 4 = 500,000
Year 5 = 800,000

Rate = 8%

No need to study since it will not come out to the exam

A

Notebook

24
Q

Find Internal rate of return

Given:
Intial Capital = (350,000)
Year 1 = 100,000
Year 2 = 200,000
Year 3 = 220,000
Year 4 = 80,000

A

Found in notebook

25
Q

Find NPV (use excel)

Given:
Intial Capital = (20,000,000)
Year 1 = 5,000,000
Year 2 = 8,000,000
Year 3 = 8,500,000
Year 4 = 7,000,000
Year 5 = 8,000,000
Year 6 = 6,000,000

Required rate of Return = 20%

A

Year 1 = 5,000,000 x 0.8333 = 4,166,500
Year 2 = 8,000,000 x 0.6944 = 5,555,200
Year 3 = 8,500,000 x 0.5787 = 4,918,950
Year 4 = 7,000,000 x 0.4823 = 3,376,100
Year 5 = 8,000,000 x 0.4019 = 3,215,200
Year 6 = 6,000,000 x 0.3349 = 2,009,400

(PVCI) 23,241,350 - (PVCO) (20,000,000)

NPV =

26
Q

Find IRR (use excel)

Given:
Intial Capital = (20,000,000)
Year 1 = 5,000,000
Year 2 = 8,000,000
Year 3 = 8,500,000
Year 4 = 7,000,000
Year 5 = 8,000,000
Year 6 = 6,000,000

A

Found in Excel

27
Q

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the:

a. Payback period

A

Found in Test #2

28
Q

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the:

b. Net Present Value

A

Found in Test #2

29
Q

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the:

b. Net Present Value

A

Found in Test #2

30
Q

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the:

c. Profitability Index

A

Found in Test #2

31
Q

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the:

d. Discounted payback period

A

Found in Test #2

32
Q

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the:

e. Internal rate of return

A

Found in Test #2

33
Q

Sunlight Company needs a machine for its manufacturing process. The Cost of the machine is 8.7 million with an expected useful life of 8 years. At the end of 8-year period, the machine would increse cash inflows by 3 million per year (per year 1- 8 years). Sunlight is interested to know the:

f. whether to accept or reject this investment. The minimum required rate of return of the company is 16% on all capital investments.

A

Found in Test #2

34
Q

The following are the expected cash inflow of a project whose economic life is 5 years and initial investment is P800,000 and discount rate of 18%

Year
0 = (800,000)
1 = 300,000
2 = 350,000
3 = 300,000
4 = 250,000
5 = 250,000

Find the:
a.) Payback period

A

Found in Test #2

35
Q

The following are the expected cash inflow of a project whose economic life is 5 years and initial investment is P800,000 and discount rate of 18%

Year
0 = (800,000)
1 = 300,000
2 = 350,000
3 = 300,000
4 = 250,000
5 = 250,000

Find the:
b.) NPV (discount rate is 12%)

A

Found in Test #2

36
Q

The following are the expected cash inflow of a project whose economic life is 5 years and initial investment is P800,000 and discount rate of 18%

Year
0 = (800,000)
1 = 300,000
2 = 350,000
3 = 300,000
4 = 250,000
5 = 250,000

Find the:
c.) Profitability Index (discount rate is 12%)

A

Found in Test #2

37
Q

The following are the expected cash inflow of a project whose economic life is 5 years and initial investment is P800,000 and discount rate of 18%

Year
0 = (800,000)
1 = 300,000
2 = 350,000
3 = 300,000
4 = 250,000
5 = 250,000

Find the:
b.) IRR (discount rate is 12%)

A

Found in Test #2

38
Q

The following are the expected cash inflow of a project whose economic life is 5 years and initial investment is P800,000 and discount rate of 18%

Year
0 = (800,000)
1 = 300,000
2 = 350,000
3 = 300,000
4 = 250,000
5 = 250,000

Find the:
e.) Will you recommend for the acceptance of the project?

A

Found in Test #2

39
Q

For a project that has an initial investment of P8.7 million, your client has asked you to determine the accounting rate of return. The data are the following:

  1. Sales revenue: 30M (2022)
  2. Cost of Cost: 40%
  3. Interest Expense: 16% of the outstanding debt of P5,000,000
  4. Tax rate: 30%
  5. Operating expenses as 10M
  6. It was learned that the income after tax in the preceding year was 10% lower than this year, 2022
A

Found in Test #2

40
Q

ABC is contemplating on venturing a new business with initial investment of P800 million pesos. The weighted average cost of capital (WACC) was determined at 15%. It has the following cash flows with zero salvage value at the end of the project:

Year 1 = P50M
Year 2 = P100M
Year 3 = P150M
Year 4-15 = P200M per year

Given the information, this client asked you to provide the following:
a.) Payback period of the project

A

Found in Test #2

41
Q

ABC is contemplating on venturing a new business with initial investment of P800 million pesos. The weighted average cost of capital (WACC) was determined at 15%. It has the following cash flows with zero salvage value at the end of the project:

Year 1 = P50M
Year 2 = P100M
Year 3 = P150M
Year 4-15 = P200M per year

Given the information, this client asked you to provide the following:
b.) Net Present Value (WACC = 15%)

A

Found in Test #2

42
Q

ABC is contemplating on venturing a new business with initial investment of P800 million pesos. The weighted average cost of capital (WACC) was determined at 15%. It has the following cash flows with zero salvage value at the end of the project:

Year 1 = P50M
Year 2 = P100M
Year 3 = P150M
Year 4-15 = P200M per year

Given the information, this client asked you to provide the following:
c.) Discounted payback period

A

Found in Test #2

43
Q

ABC is contemplating on venturing a new business with initial investment of P800 million pesos. The weighted average cost of capital (WACC) was determined at 15%. It has the following cash flows with zero salvage value at the end of the project:

Year 1 = P50M
Year 2 = P100M
Year 3 = P150M
Year 4-15 = P200M per year

Given the information, this client asked you to provide the following:
d.) Profitability Index

A

Found in Test #2

44
Q

ABC is contemplating on venturing a new business with initial investment of P800 million pesos. The weighted average cost of capital (WACC) was determined at 15%. It has the following cash flows with zero salvage value at the end of the project:

Year 1 = P50M
Year 2 = P100M
Year 3 = P150M
Year 4-15 = P200M per year

Given the information, this client asked you to provide the following:
e.) Internal rate of return

A

Found in Test #2

45
Q

Who are you?

A

A CPA, Lawyer, Doctor, RMT, Master degree holder and has 3 certifications in belt.

2-13. BA-FM 21P Intro to Financial Management (4 decks)

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