Quiz 3

Name (SURNAME, First name, M.I.):

Section: Date:

INSTRUCTIONS. Choose the letter of the correct answer. (ALL CAPS).

Intro to Management Accounting and Recent Developments

1. A managerial accounting team is working with a production manager to determine the cause of
unexpected production delays. Based on the analysis, the manager is able to revise the production
process, thus avoiding future delays. This is an example of how managerial accounting does which of
the following?
A. Ensures compliance with GAAP
B. Helps a manager control the company
C. Helps the company meet legal requirements
D. Assists with financial reporting

2. The value chain of a manufacturer would tend to include activities related to:
A. manufacturing.
B. research and development.
C. product design.
D. marketing.
E. All of the other answers are correct.

3. Which consideration influences the frequency of an internal report?

A. The wishes of the managers receiving the report.
B. The frequency with which decisions are made that require the information in the report.
C. The cost of preparing the report.
D. All of the above.

4. A just-in-time manufacturer is more likely than a conventional manufacturer to

A. receive more frequent deliveries of materials.
B. spend less money on advertising.
C. need workers with fewer skills.
D. all of the above.

5. Which of the following would occupy a line position in a hospital?

A. manager of the cafeteria
B. hospital administrator
C. chief of surgery
D. none of these

Cost Behavior

6. Statement 1. A scattergraph is useful in recognizing unusual patterns in the cost data.

Statement 2. A scattergraph cannot be created by hand because it is too complex.
A. Both are true
B. Both are false
C. Statement 1 is true
D. Statement 2 is true

7. Statement 1. The high-low method needs three observations of costs to calculate the cost formula.
Statement 2. The least-squares regression method uses all of the available data to find the best fitting
line.
A. Both are true
B. Both are false
 C. Statement 1 is true
D. Statement 2 is true

8. Stella, Inc. must perform maintenance on its production machinery after every 10,000 units
produced. Production varies between 12,000 and 30,000 units a year. The cost of this maintenance
would be classified as a
A. variable cost.
B. fixed cost.
C. step cost.
D. mixed cost.

9. Booster, Inc. recently conducted a least-squares regression analysis to predict selling expenses. The
company has constructed the following regression equation: Y = 329,000 + 7.80X. Which of the
following statements is false if the primary cost driver is number of units sold?
A. The company anticipates P329,000 of fixed selling expenses.
B. "Y" represents total selling expenses.
C. The company expects both variable and fixed selling expenses.
D. For each unit sold, total selling expenses will increase by P7.80.
E. "X" represents the number of hours worked during the period.

10. Blacken Company manufactures motorcycles. The company's management accountant wants to
calculate the fixed and variable costs associated with utility cost incurred by the factory. Data for the
past five months were collected.
Month Utility cost Machine hours
March P 30,255 2,200
April 32,750 2,525
May 34,712 2,710
June 31,850 2,410
July 30,720 2,290
Using a regression program, the forecasted utility cost at 2,300 machine hours (rounded to the
nearest dollar) is
A. P30,940.
B. P37,116.
C. P25,945.
D. P10,631.

CVP Analysis
11. If a company increases advertising by P500,000, this will cause net operating income to increase if the
resulting increase in sales dollars is greater than:
A. P500,000.
B. P500,000 divided by the percentage increase in advertising.
C. P500,000 divided by the degree of operating leverage.
D. P500,000 divided by the contribution margin ratio.

12. If company A has a higher degree of operating leverage than company B, then:
A. company A has higher variable expenses.
B. company A's profits are more sensitive to percentage changes in sales.
C. company A is more profitable.
D. company A is less risky.

For the next three questions:

Hurst Co. manufacturers and sells a single product. Price and cost data regarding this product are as
follows:
Selling price P 40 per unit
Variable manufacturing costs P 20 per unit
Variable selling and admin expenses P 6 per unit
Fixed manufacturing overhead P 208,000 per year
Fixed selling and admin expenses P 324,000 per year
13. The break-even point in units per year is:
A. 15,200 units
B. 26,600 units
C. 38,000 units
D. 40,000 units

14. How many units need to be sold to earn an annual net operating income equal to 10% of sales?
A. 44,000 units
B. 53,200 units
C. 54,500 units
D. 47,500 units

15. In the current year, the company sold 43,000 units. Due to competition, management will be forced
to lower the selling price by 10% next year. How many units must be sold next year to earn the same
income as was earned in the current year?
A. 50,000 units
B. 53,200 units
C. 58,800 units
D. 60,200 units

16. The following data concern two products sold by Redding Corporation.

Product X Product Y
Sales in pesos P100,000 P50,000
Contribution margin 70% 40%

If fixed expenses for the company as a whole are P120,000, and If the sales mix shifts toward Product
X, and product contribution margin ratios remain unchanged, one would expect the break-even point
for the company as a whole to:
A. increase.
B. decrease.
C. remain unchanged.
D. it is impossible to determine.
Absorption vs Variable Costing
17. Statement 1. Firms may choose to use absorption costing or variable costing for external financial
reporting purposes.
Statement 2. Full absorption costing divides fixed overhead between Cost of Goods Sold and period
expenses.
A. Both are true
B. Both are false
C. Statement 1 is true
D. Statement 2 is true

18. Lockhart Products produces a single product. During 2009, the company incurred the following costs:
Variable product costs P8.00 per unit
Variable period costs P2.00 per unit
Total fixed product costs P21,000
Total fixed period costs P10,000
Lockhart had no units in beginning inventory. During 2009, 6,000 units were produced and 5,000
units were sold. Which of the following statements is true when comparing net income using
absorption versus variable costing?
A. Net income will be P3,500 lower using absorption costing than using variable costing.
B. Net income will be P4,200 lower using absorption costing than using variable costing
C. Net income will be P3,500 higher using absorption costing than using variable costing.
D. Net income will be P4,200 higher using absorption costing than using variable costing.

For the next two items:

 Rounder Industries manufactures a single product. Variable production costs are P20 and fixed
production costs are P300,000. Rounder uses a normal activity of 20,000 units to set its standard
costs. Rounder began the year with no inventory, produced 22,000 units, and sold 21,000 units.

19. The volume variance under absorption costing would be

A. P0.
B. P20,000.
C. P30,000.
D. some other number.

20. The standard cost of goods sold under absorption costing would be
A. P400,000.
B. P420,000.
C. P735,000.
D. some other number.

Short term decision making and relevant costing

21. Violet has received a special order for 100 units of its product. The product normally sells for P2,000
and has the following manufacturing costs:

Per unit
Direct materials P 600
Direct labor 300
Variable MOH 400
Fixed MOH 500
Unit cost P1,800
Assume that Violet has sufficient capacity to fill the order without harming normal production and
sales. What minimum price should Violet charge to achieve a P25,000 incremental profit?
A. P1,300
B. P1,550
C. P1,680
D. P1,800

22. Clifford, Inc. currently manufactures 2,000 subcomponents in one of its factories. The unit costs to
produce the subcomponents are:
The unit costs to produce are:
Per unit
Direct materials P 60
Direct labor 100
Variable MOH 75
Fixed MOH 90
Total 325

Due to a labor strike, Clifford is considering purchasing the subcomponents from an outside supplier
for P250 per unit rather than paying the 10% increase in direct labor costs demanded by the union.
Fixed overhead is not avoidable. If Clifford purchases the subcomponent from the outside supplier,
how much will profit differ from what it would be if it manufactured the subcomponents with the
increase in direct labor cost?
A. P30,000 less
B. P20,000 less
C. P10,000 less
B. P20,000 more

23. Randall Corporation is a table manufacturing company that has the following cost structure for
producing table tops. The variable administrative cost is incurred only if the table tops are
manufactured by Randall.
Unit Costs Direct materials P23.00
Direct labor 12.00
Variable manufacturing overhead 10.00
 Fixed manufacturing overhead 17.00
Variable administrative costs 2.00
Fixed administrative costs 3.00
Total unit costs P67.00
Recently, Randall Corporation received an offer from Blurr Corporation to supply the table tops to
Randall. Randall is considering buying the table tops from Blurr instead of manufacturing them
internally. Which one of the following statements is correct?
A. Randall should reject Blurr's offer if it is less than P47.00.
B. Randall should accept Blurr's offer if it is less than P47.00. Correct
C. Randall should reject Blurr's offer if it is P50.00 or greater.
D. Randall should accept Blurr's offer if it is less than P64.00.

24. Maple Inc. manufactures a product that costs P45 per unit plus P50,000 in fixed costs each month.
Maple currently sells 5,000 of these units per month for P60 each. If Maple leased a machine for
P30,000 a month, it could add features to the product that would allow it to increase the selling price.
It would cost an additional P10 per unit to add these features. How much would Maple have to
charge for the product with additional features to make it worthwhile to lease the machine?
A. P55
B. P60
C. P71
D. P76

25. Pinter Corp. produces three products, and is currently short on machine hours since one of its two
machines is down - only 360 hours are available this month. The selling price, costs, labor
requirements, and demand of the three products are as follows:

Product A Product B Product C

Selling price P5.00 P3.00 P5.00
Variable cost per unit P3.50 P2.00 P2.00
Machine hours per unit 0.75 0.25 1.00
Demand 300 400 210

How many of each product should be sold while the machine is down to maximize profit?
A. 200 of Product A, 0 of Product B, and 210 of Product C.
B. 0 of Product A, 1,440 of Product B, and 0 of Product C.
C. 66 of Product A, 400 of Product B, and 210 of Product C.
D. 300 of Product A, 400 of Product B, and 210 of Product C.

26. Good Earth Products produces orange juice and candied orange peels. A 1,000-pound batch of
oranges, costing P500, is transformed using labor of P50 into 100 pounds of orange peels and 300
pints of juice. The company has determined that the sales value of 100 pounds of peels at the split-off
point is P350, and the value of a pint of juice (not pasteurized or bottled) is P0.40. Beyond the split-
off point, the cost of sugar coating and packaging the 100 pounds of peels is P150. The cost of
pasteurizing and packaging the 300 pints of juice is P260. A 100-pound box of sugar-coated peels can
be sold to commercial baking companies for P600. Each pint of pasteurized juice can be sold for
P1.00.

What is the incremental benefit (cost) to the company of sugar coating 100 pounds of peels rather
than selling the peels at the split-off point? And what is the incremental benefit (cost) to the company
of pasteurizing and packaging a pint of juice rather than selling the juice at the split-off point?
A. P250 for peels; P180 for juice
B. (P150) for peels; (P260) for juice
C. (P100) for peels; P80 for juice
D. P100 for peels; (P80) for juice

27. Allocated common fixed costs:

A. can make a product line appear to be unprofitable.
B. are always incremental costs.
C. are always relevant in decisions involving dropping a product line.
 D. responses A, B, and C are all correct.

28. Which of the following is NOT relevant to a decision about whether to drop a segment?
A. The contribution margin expected to be produced by the segment.
B. The avoidable fixed costs direct to that segment.
C. The complementary effects of dropping the segment.
D. "None of the above" is the best answer because all of the above are relevant.

29. Franklin, Inc. has two divisions, Seward and Charles. Following is the income statement for the
previous year:
Seward Charles
Sales P600,000 P400,000
Variable Costs 195,000 250,000
Contribution Margin P405,000 P150,000
Fixed Costs 175,000 170,000
Profit Margin P230,000 P(20,000)

Of the total fixed costs, P300,000 are common fixed costs that are allocated equally between the
divisions. How much did the Charles division incur in direct fixed costs?
A. P20,000
B. P150,000
C. P170,000
D. P300,000

30. Which of the following is NOT relevant in deciding whether to process a joint product beyond its split-
off point?
A. The split-off value.
B. The price after additional processing.
C. The cost of further processing.
D. The cost of operating the joint process.

31. Which of the following is NOT relevant in a make-or-buy decision about a part the entity uses in some
of its products?
A. The reliability of the outside supplier.
B. The alternative uses of owned equipment used to make the part.
C. The outside supplier's per-unit variable cost to make the part.
D. The number of units of the part needed each period.

32. Which of the following is NOT relevant to a decision about whether to drop a segment?
A. The contribution margin expected to be produced by the segment.
B. The avoidable fixed costs direct to that segment.
C. The complementary effects of dropping the segment.
D. "None of the above" is the best answer because all of the above are relevant.

33. Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for
P30. Manufacturing and other costs are as follows:

Variable costs per unit: Fixed costs per month:

Direct materials P 9.00 Factory overhead P120,000
Direct labor 4.50 Selling and admin. 60,000
Factory overhead 3.00 Total P180,000
Distribution 1.50
Total P18.00

The variable distribution costs are for transportation to the retail stores. The current production and sales
volume is 20,000 per year. Capacity is 25,000 units per year. A Tennessee manufacturing firm has offered
a one-year contract to supply speakers at a cost of P17.00 per unit. If Miller Company accepts the offer, it
will be able to rent unused space to an outside firm for P18,000 per year. All other information remains
the same as the original data. What is the effect on profits if Miller Company buys from the Tennessee
firm?
 A. decrease of P8,000
B. increase of P9,000
C. increase of P8,000
D. decrease of P6,000

Budgeting

34. A definition of zero-based budgeting is set out below with two blank sections.
“Zero-based budgeting: a method of budgeting which requires each cost element _______, as
though the activities to which the budget relates ________.”
Which combinations of two phrases correctly completes the definition?
Blank 1 Blank 2
To be specifically justified could be outsourced to an external supplier
To be set at zero could be outsourced to an external supplier
To be specifically justified were being undertaken for the first time
To be set at zero were being undertaken for the first time

35. Which of the following is an advantage of non-participative budgeting as compared to participative

budgeting?
A. It increases motivation
B. It is less time consuming
C. It increases acceptance
D. The budgets produced are more attainable

36. An incremental budgeting system is:

A. A system which budgets only for the extra costs associated with a particular plan
B. A system which budgets for the variable manufacturing costs only
C. A system which prepares budgets only after the manager responsible has justified the
continuation of the relevant activity
D. A system which prepares budgets by adjusting the previous year’s values by expected changes in
volume of activity and price/inflation effects.

37. Budgeted operating income includes

A. budgeted interest expense.
B. budgeted income taxes.
C. budgeted cost of goods sold.
D. budgeted net income.
E. none of these.

38. A production budget is most important for which of the following?

A. retail stores
B. manufacturing firms
C. not-for-profit agencies
D. local government agencies
E. all of these

39. Which of the following statements about employee motivation is true?

A. A budget that is too easy to achieve is more likely to motivate than a budget that is too difficult or
that is tight but attainable.
B. A budget that is too difficult to achieve is more likely to motivate than a budget that is too easy or
that is tight but attainable.
C. A budget that is tight but attainable is more likely to motivate than a budget that is too easy or
too difficult to achieve.
D. Budgets are difficult to use for motivation.

40. Marlow Company produces hand tools. A production budget for the next four months is as follows:
March 10,300 units, April 13,300, May 16,500, and June 21,800. Marlow Company's ending finished
 goods inventory policy is 10% of the following month's sales. Marlow plans to sell 16,000 units in
May. What is budgeted ending inventory for March?
A. 1,030
B. 1,300
C. 1,330
D. 1,650

41. Arbor Co. has forecast sales to be P400,000 in May, P475,000 in June, P575,000 in July and P700,000
in August. Forty percent of sales are cash, the remainder is on credit. Credit sales are collected 60% in
the month of sale, the remaining the following month. What are budgeted cash collections for July?
A. P230,000
B. P334,000
C. P459,000
D. P551,000

42. Budgets are:

A. Closely associated with the management function of directing
B. A guarantee for accomplishing the profit objective
C. A deterrent to waste
D. Voted on and approved by shareholders

43. Statement 1. A JIT manufacturer that maintains no inventory doesn't need a cash disbursements budget.
Statement 2. The budget for a retailer is likely to be more complex than that for a manufacturer because a
retailer has a wider variety of customers.
A. Statement 1 is true
B. Statement 2 is true
C. Both statements are true
D. Neither statements are true

For the next four items

Presented below is the balance sheet of ABC Company as of December 31, 2015:
Assets Liabilities & Equity
Cash Php30,400 Income Tax payable Php 4,800
Accounts receivable 48,000
Inventory 17,600 Ordinary Shares 256,000
PPE 232,000 Retained Earnings 67,200
Total Assets Php328,000 Total L&E Php328,000

The manager instructs you to update the balances based on the budget below:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Sales Php112,000 Php128,000 Php144,000 Php140,800
Production Costs 76,800 80,000 89,600 80,000
Operating expenses 25,600 27,200 28,800 30,400

• Annual depreciation (included in the amounts above):

o Production costs: Php70,400
o Operating expenses: Php19,200
• Inventory balances are expected to be:
March 31: Php56,000 June 30: Php52,000 September 30: Php60,000 December 31: Php48,000

• All production costs and operating expenses, except depreciation, are to be paid during the quarter incurred.
• Sales are made either through cash or credit. The Company expects quarterly sales to be made 20% in cash and
80% in credit. As to the credit sales, the same are collected 50% in the quarter of sales and 48% in the quarter after
the sale. The rest are budgeted to be uncollectible and recognized as bad debts in the quarter incurred. There is no
allowance for bad debts as of December 31, 2015.
• Dividends are paid at the end of June and December. The amount of dividends is 10% of the cash balance available
at the end of the 1st quarter for June dividends and the 3rd quarter for December dividends.
• Income tax is equal to 30% of the quarter’s income and is paid in the following quarter.

44. Cash balance as of September 30, 2016:

A. P110,992 C. P60,800
B. P142,280 D. P75,866

45. Income tax expense for the second quarter of 2016:

 A. P13,862 C. P4,426
B. P9,389 D. P4,844

46. Budgeted accounts receivable (net) as of December 31, 2016

A. P54,067 C. P61,440
B. P55,296 D. P62,464

47. Cash sales for the third quarter of 2016

A. P28,800 C. P25,600
B. P22,400 D. P28,160

For the next three items:

CNI Company is preparing its cash budget for the last two months of the fourth quarter of the calendar year 2016.
Following are some pertinent budget data gathered by the company’s budget committee:

October November December

Sales Php280,000 Php300,000 Php360,000
Accounts payable for merchandise purchases 100,000 140,000 144,000
Salaries 100,000 150,000 180,000
Other expenses 110,000 130,000 58,500

Additional information from the budgets are presented below:

• Collection pattern: 60% of each month’s sales is collected in the month of sale; the balance is collected in the
following month
• Payment of accounts payable: 80% of the current month’s accounts payable budget is paid during the month of
purchase and the balance is paid in the following month
• The budgeted other expenses include depreciation in the amount of Php22,000 per month. Expenses requiring
cash outlays are paid for in the month of incurrent.
• The company intends to maintain a cash balance Php100,000.
o In case of deficits, the company may borrow from its bank in multiples of Php10,000 which would bear
an interest rate of 12% per year. Principal repayments are to be made in any month in which there is a
surplus of cash. Interest is paid monthly.
o There is no outstanding balance of loans from banks as of November 1.
o If there is no outstanding balance on the loan, the company will invest any cash in excess of its desired
end-of-month cash balance in government securities. No investments were outstanding as of November 1.

48. For the month of November, determine the ending cash balance
A. Php77,300 C. Php102,000
B. Php100,000 D. Php107,300

49. Determine the amount borrowed for the month of December

A. Php0 C. Php90,000
B. Php30,000 D. Php100,000

50. For the month of December, interest payment:

A. P1,000 C. P3,000
B. P2,000 D. P4,000

Capital Budgeting

51. A company installed new equipment with a four-year useful life and no salvage value. The new
equipment cost P600,000 and will generate pretax cash savings of P150,000 annually. Old equipment
with a book value of P50,000 and a remaining life of two years was sold for P20,000 when the new
equipment was purchased. The company uses straight-line depreciation and its effective income tax
rate is 40%. The second year’s relevant after-tax cash flow is
A. P150,000.
B. P110,000.
C. P90,000.
D. P140,000.

52. The following schedule reflects the incremental costs and revenues for a capital project. The
company uses straight-line depreciation. The interest expense reflects an allocation of interest on the
amount of this investment, based on the company's weighted average cost of capital.
Revenues P 650,000
 Direct costs P270,000
Variable overhead 50,000
Fixed overhead 20,000
Depreciation 70,000
General & administrative 40,000
Interest expense 8,000
Total costs 458,000
Net profit before taxes P192,000

The annual cash flow from this investment, before tax considerations, would be
A. P270,000.
B. P192,000.
C. P262,000.
D. P200,000.

53. Garfield, Inc. is considering a 10-year capital investment project with forecasted revenues of P40,000
per year and forecasted cash operating expenses of P29,000 per year. The initial cost of the
equipment for the project is P23,000, and Garfield expects to sell the equipment for P9,000 at the
end of the tenth year. The equipment will be depreciated over 7 years. The project requires a working
capital investment of P7,000 at its inception and another P5,000 at the end of year 5. Assuming a 40%
marginal tax rate, the expected net cash flow from the project in the tenth year is
A. P20,000.
B. P24,000.
C. P32,000.
D. P11,000.

54. The Moore Corporation is considering the acquisition of a new machine. The machine can be
purchased for P90,000; it will cost P6,000 to transport to Moore's plant and P9,000 to install. It is
estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of
P5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling
price of P500 and combined material and labor costs of P450 per unit. Federal tax regulations permit
machines of this type to be depreciated using the straight-line method over 5 years with no
estimated salvage value. Moore has a marginal tax rate of 40%.
What is the net cash outflow at the beginning of the first year that Moore Corporation should use in a
capital budgeting analysis?
A. P(105,000)
B. P(96,000)
C. P(85,000)
D. P(90,000)

55. All of the following are advantages of using payback to evaluate the acceptability of projects except:
A. the payback method is easy to calculate.
B. the payback method is a good indicator of the profitability of the project.
C. the payback method helps to estimate the relative risk of projects.
D. the payback method gives a quick estimate of when the initial investment will be recovered.

56. Which of the following is a feature of net present value?

A. Net present value assumes reinvestment of cash flows at the actual rate of return of the project.
B. Net present value does not depend upon the size of the project.
C. Net present value calculates the actual rate of return of a project.
D. Net present value requires the calculation of a discount rate, or hurdle rate

57. Allstar Company invests in a project with expected cash inflows of P9,000 per year for four years. All
cash flows occur at year-end. The required return on investment is 9%. If the project generates a net
present value (NPV) of P3,000, what is the amount of the initial investment in the project?
A. P36,000.
B. P29,160.
C. P26,160.
 D. P33,000.

58. Quad Company is considering buying new equipment costing P450,000 to update its tailgating
business. Management anticipates that the machine will produce cash sales of P237,000 each year
over the next five years. Annual cash expenses are projected to be P85,000. Quad plans to use
straight-line depreciation with a residual (salvage) value of P63,000. Quad's combined income tax
rate is 30%. Determine the net present value for the investment.
Assume straight-line depreciation is used; and Quad's management has set a 14% hurdle rate on
similar investments.
Present value of P1, 14%, five periods = 0.519
Present value of an annuity of P1, 14%, five periods = 3.433
A. (P55,465)
B. (P5,015)
C. P477,682
D. P27,716

59. Investment Project B will require an initial investment of P430,000 and is expected to generate after-
tax net cash inflows of P133,500 each year over the project's five-year life. Management has
established a hurdle rate of 12% on similar investments. What is the investment's expected internal
rate of return and should the company invest in the project?
A. Less than the 12% hurdle; reject the project
B. Equal to the 12% hurdle; indifferent about investing in the project
C. Greater than the 12% hurdle; invest in the project
D. Unable to determine the internal rate of return with the information provided

60. With regard to net present value and internal rate of return, mutually exclusive projects are those
where:
A. the acceptance of one project does not affect the decision involving other projects.
B. the acceptance of one project requires the acceptance of one or more other projects.
C. the acceptance of one project excludes other projects from consideration.
D. if the company has adequate capital, all projects may be accepted.

61. Woods Inc. is considering four independent investment proposals. Woods has P3 million available for
investment during the present period. The investment outlay for each project and its projected net
present value (NPV) is presented below. Project Investment cost NPV
I P 500,000 P 40,000
II 900,000 120,000
III 1,200,000 180,000
IV 1,600,000 150,000

Which of the following project options should be recommended to Woods' management?

A. Projects III and IV only.
B. Projects II, III, and IV only.
C. Projects I, II, and III only.
D. Projects I, II, and IV only

62. Kampit, Inc. is contemplating a 5-year capital investment project with estimated revenues of P80,000
per year and estimated cash operating expenses of P50,000 per year. The initial cost of the Plant &
Equipment for the project is P50,000, and the company expects to sell the equipment for P5,000 at
the end of the 5th year. P&E will be fully depreciated over 4 years on a straight-line basis for tax
purposes. The project requires a working capital investment of P20,000 at its inception. The cost of
capital for Kampit is 10%. Assume a 40% marginal tax rate for the company. The payback period for
the project is
A. 2.17 years
B. 2.04 years
C. 3.04 years
D. 3.17 years
63. Kell Inc. is analyzing an investment for a new product expected to have annual sales of 100,000 units
for the next 5 years and then be discontinued. New equipment will be purchased for P1,200,000 an
cost P300,000 to install. The equipment will be depreciated on a straight-line basis over 5 years for
financial reporting purposes and 3 years for tax purposes. At the end of the fifth year, it will cost
P100,000 to remove the equipment, which can be sold for P300,000. Additional working capital of
P400,000 will be required immediately and needed for the life of the product. The product will sell for
P80, with direct labor and material cost of P65 per unit. Annual indirect costs will increase by
P500,000. Kell’s effective tax rate is 40%. In ca capital budgeting analysis, what is the expected cash
flow at time = 4 (fourth year of operations) that Kell should use to compute the net present value.
A. P800,000
B. P600,000
C. P1,120,000
D. P720,000

64. National, Inc., is considering three mutually exclusive projects. Each project would involve an initial
investment of P7,000 and generate the following cash inflows.
Year Project X Project Y Project Z
1 P5,000 P 1,000 P 5,000
2 4,000 1,000 0
3 2,000 2,000 2,000
4 0 7,000 4,000
Total P11,000 P11,000 P11,000

Given a cost of capital of 10%, rank the projects in descending order of net present value (NPV).
A. X, Y, Z.
B. X, Z, Y.
C. Y, Z, X.
D. Z, Y, X.

65. In order to increase production capacity, Gunning Industries is considering replacing an existing
production machine with a new technologically improved machine effective January 1. The following
information is being considered by Gunning Industries:
 The new machine would be purchased for P160,000 in cash. Shipping, installation, and testing
would cost an additional P30,000.
 The new machine is expected to increase annual sales by 20,000 units at a sales price of P40 per
unit. Incremental operating costs include P30 per unit in variable costs and total fixed costs of
P40,000 per year.
 The investment in the new machine will require an immediate increase in working capital of
P35,000. This cash outflow will be recovered after 5 years.
 Gunning uses straight-line depreciation for financial reporting and tax reporting purposes. The
new machine has an estimated useful life of 5 years and zero salvage value.
 Gunning is subject to a 40% corporate income tax rate. Gunning uses the net present value
method to analyze investment

The overall discounted cash flow impact of Gunning Industries’ working capital investment for the new
production machine would be
A. P(7,959)
B. P(10,080)
C. P(13,265)
D. P(35,000)

66. Bleeker Corporation is investigating buying a small used aircraft for the use of its executives. The
aircraft would have a useful life of 8 years. The company uses a discount rate of 12% in its capital
budgeting. The net present value of the initial investment and the annual operating cash cost is
negative P280,449. Management is having difficulty estimating the annual benefit of having the
aircraft and estimating the salvage value of the aircraft.
 Ignoring the annual benefit, to the nearest whole hundred pesos how large would the salvage value
of the aircraft have to be to make the investment in the aircraft financially attractive?
A. P113,300
B. P280,400
C. P28,900
D. P596,300
E. P694,400

67. In capital budgeting, sensitivity analysis is used

A. to determine whether an investment is profitable.
B. to see how a decision would be affected by changes in variables.
C. to test the relationship of the IRR and NPV.
D. to evaluate mutually exclusive investments.

68. A unique feature of the analysis of a replacement decision is that

A. the analysis considers total rather than differential costs.
B. the amount used as the cost of the investment is not likely to equal the price to be paid for the
new asset.
C. the time value of money is ignored.
D. such decisions seldom involve cash flows.

69. Statement 1. The payback method considers project profitability

Statement 2. The payback method ignores cash flows after the payback period
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false

70. Lewis Services is evaluating six investment opportunities (projects). The following table reflects each
project’s net present value NPV and the respective initial investments required. All of these projects
are independent.
Project NPV Investment
I 2,500 2,500
II 4,000 20,000
III 7,500 30,000
IV 8,000 40,000
V 2,000 10,000
VI 2,500 5,000
Lewis has an investment constraint of P50,000. Which combination of projects would represent the
optimal investment that should be recommended to Lewis Services’ management?
A. I, III, and VI
B. I, III, V, and VI
C. IV only
D. I, IV and VI
E. I, III and IV