________1.

The capital budget is a(n)

A. Plan to insure that there are sufficient funds
available for the operating needs of the
company
B. Exercise that sets the long range goals of the
company including the consideration of
external influences
C. Plan that coordinates and communicates a
companys plan for the coming year to all
departments and divisions
D. Plan that assesses the long-term needs of the
company for plant and equipment purchases
________2. Capital budgeting techniques are
least likely to be used in evaluating the
A. Acquisition of new aircraft by a cargo
company
B. Design and implementation of a major
advertising program
C. Adoption of a new method of allocating nontraceable cost to product lines
D. Sale by a conglomerate of an unprofitable
division
________3. In capital expenditure decisions, the
following are relevant in estimating operating
costs except
A.
B.
C.
D.

Future costs
Cash costs
Differential costs
Historical costs

________4. In capital budgeting decisions, the

following items are considered among others:
(1)
(2)
(3)
(4)

Cash outflow for the investment

Increase in working capital requirements
Profit on sale of old asset
Loss on write-off of old asset

For which of the above items would taxes be

relevant?
A.
B.
C.
D.

Items 1 and 3 only

Items 3 and 4 only
All items
Items 1, 3 and 4 only

________5. All of the following are methods that

aid management in analyzing the expected result
of capital budgeting decisions, except
A.
B.
C.
D.

Accrual accounting rate of return

Payback method
Future value cash flow
Discounted cash flow rate of return

________6. The consulting firm of Magaling

Corporation is considering the replacement of
their computer system. Taking into account the
income tax effect and considering the carrying
value of the old system (CVOS) and the salvage
value of the new system (SVNS), which
combination below applies to the decision making
process?
A.
B.
C.
D.

CVOS,
CVOS,
CVOS,
CVOS,

irrelevant and SVNS, irrelevant

irrelevant and SVNS, relevant
relevant and SVNS, irrelevant
relevant and SVNS, relevant

________7. As a capital budgeting technique, the

payback period considers depreciation expense
(DE) and time value of money (TVM) as follows:
A.
B.
C.
D.

DE,
DE,
DE,
DE,

relevant and TVM, relevant

irrelevant and TVM, irrelevant
irrelevant and TVM, relevant
relevant and TVM, irrelevant

________8. 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 and 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 initial investment for
analyzing the acquisition of the new press
assuming a 35% income tax rate would be
A.
B.
C.
D.

P
P
P
P

2,450,000
2,425,000
2,600,000
2,250,000

________9. Key Corp. plans to replace a

production machine that was acquired several
years ago. Acquisition cost is P450,000 with
salvage value of P50,000. The machine being
considered is worth P800,000 and the supplier is
willing to accept the old machine at a trade-in
value of P60,000. Should the company decide not
to acquire the new machine, it needs to repair the
old one at a cost of P200,000. Tax wise, the tradein transaction will not have any implication but
the cost to repair is tax-deductible. The effective
corporate tax rate is 35% of net income subject
to tax. For purposes of capital budgeting, the net
investment in the new machine is
A. P 540,000
B. P 610,000
C. P 660,000
Page 1 of 3

D. P 800,000
________10. Regal Industries is replacing a
grinder purchased 5 years ago for P15,000 with a
new one costing P25,000 cash. The original
grinder is being depreciated on a straight-line
basis over 15 years to a zero salvage value. Regal
will sell this old equipment to a third party for
P6,000 cash. The new equipment will be
depreciated on a straight-line basis over 10 years
to a zero salvage value. Assuming a 40%
marginal tax rate, Regals net cash investment at
the time of purchase if the old grinder is sold and
the new one is purchased is
A.
B.
C.
D.

P
P
P
P

19,000
15,000
17,400
25,000

________11. Lawson Inc is expanding its

manufacturing plant, which requires an
investment of P4 million in new equipment and
plant modifications. Lawsons sales are expected
to increase by P3 million per year as a result of
the expansion. Cash investments in current
assets average 30% of sale; accounts payable
and other current liabilities are 10% of sales.
What is the estimated total investments for this
expansion?
A.
B.
C.
D.

P
P
P
P

3.4
4.3
4.6
5.2

million
million
million
million

________12. In equipment replacement decisions,

which one of the following does not affect the
decisions-making process?
A.
B.
C.
D.

Current disposal price of the old equipment

Operating costs of the old equipment
Original costs of the new equipment
Operating costs of the new equipment

________13. A company considers a project that

will generate cash sales of P50,000 per year.
Fixed costs will be P10,000 per year, variable
costs will be 40% of sales, and depreciation of the
equipment in the project will be P5,000 per year.
Taxes are 40%. The expected annual cash flow to
the company resulting from the project is
A.
B.
C.
D.

P
P
P
P

15,000
9,000
19,000
14,000

________14. Arlene Inc currently has annual cash

revenues of P2,400,000 and annual operating
costs of P1,850,000 (all cash items except

depreciation of P350,000). The company is

considering the purchase of a new machine
costing P1,200,000 that would increase cash
revenues to P2,900,000 and operating costs
(including depreciation) to P2,050,000. The new
machine would increase depreciation to P500,000
per year. Revenues are expected to increase to
P2,900,000 and assuming a 35% income tax rate,
Arlenes incremental after tax cash flows from the
machine would be:
A.
B.
C.
D.

P
P
P
P

330,000
345,000
295,000
300,000

________15. Which of the following statements

concerning cash flow determination for capital
budgeting purposes is not correct?
A. Tax depreciation must be considered because
it affects cash payment for taxes
B. Book depreciation is relevant because it
affects net income
C. Net working capital changes should be
included in cash flow forecasts
D. Relevant opportunity costs should be included
in cash flow forecasts
________16. Which one of the following
statements about the payback method of
investments analysis is correct? The payback
method
A. Does not consider the time value of money
B. Considers cash flows after the payback has
been reached
C. Uses discounted cash flow techniques
D. Is rarely used in practice
________17. An investment project is expected to
yield P10,000 in annual revenues, will incur
P2,000 in fixed cost per year, and requires an
initial inventory of P5,000. Given a cost of goods
sold of 60% of sales and ignoring taxes, what is
the payback period in years?
A.
B.
C.
D.

2.50
5.00
2.00
1.25

________18. Mary Company recently acquired a

machine at a cost of P64,000. It will be
depreciated on a straight-line basis over eight
years with no estimated salvage value. Mary
estimates that this machine will produce an
annual net cash inflow (before income taxes) of
P18,000. Assuming an income tax rate of 35%,
what is the approximate payback period on the
investment?
Page 2 of 3

A.
B.
C.
D.

(1) The ARR is based on the actual basis, not

cash basis
(2) The ARR does not consider the time value
of money
(3) The profitability of the project is not
considered

4.4 years
12.8 years
7.1 years
3.6 years

________19. Which of the following is necessary in

order to calculate the payback period for a
project?

From the above statements, which at considered

limitations of the ARR concept?

A.
B.
C.
D.

A.
B.
C.
D.

Useful life
Minimum desired rate of return
Net present value
Annual cash flow

________20. The payback reciprocal is an

estimate of the internal rate of return. The Bravo
Inc is considering the acquisition of a
merchandise picking system to improve customer
service. Annual cash returns on investment cost
of P1.2 million is P220,000. Useful life is
estimated at 8 years. The companys cost of
capital is 14% and income tax rate is 35%.
Calculate Bravo Incs payback reciprocal for this
investment
A.
B.
C.
D.

20.5%
18.3%
11.9%
22.2%

________21. The bailout payback method

A. Incorporates the time value of money
B. Equals the recovery period from normal
operations
C. Eliminates the disposal value from the
payback calculation
D. Measures the risk is a project is terminated

Statements 2 and 3 only

Statements 3 and 1 only
All the 3 statements
Statements 1 and 2 only

________24. A capital budgeting method that

provides a rough approximation of an
investments profitability as measured with net
income from the income statement is known as
A.
B.
C.
D.

Average rate of return method

Net present value method
Payback period method
Internal rate of return method

________25. The Hablot 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 return on the initial
investment?
A.
B.
C.
D.

5%
12%
10%
15%

________22. Mark Company purchased a new

machine on January 1 of this year for an amount
of P90,000 with an estimated useful life of 5
years and a salvage value of P10,000. The
machine will be depreciated using the straightline method. The machine is expected to produce
cash flows from operations, net of income taxes,
of P36,000 a year in each of the next 5 years. The
new machines salvage value is P20,000 in years
1 and 2, and P15,000 in years 3 and 4. What will
be the bailout period (rounded) for this new
machine?
A.
B.
C.
D.

1.4
2.2
1.9
3.4

years
years
years
years

________23. The following statements refer to the

accounting rate of return (ARR):
Page 3 of 3