Chapter-14 - This Accounting Materials are brought to you by www.everything.freelahat.com CHAPTER 14 CAPITAL BUDGETING[Problem 1 Purchase price

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This Accounting Materials are brought to you by www.everything.freelahat.com CHAPTER 14 CAPITAL BUDGETING [Problem 1] Purchase price P140,000 Trade-in allowance ( 7,000) Saving from repairs ( 25,000) Additional tax on savings (P25,000 x 40%) 10,000 Net cost of investment for decision analysis 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 P900,000 Freight charge 25,000 Installation costs 22,000 Special attachment 55,000 Add’l working capital 110,000 Proceeds from sale of old assets ( 22,000) Tax savings (P38,000 x 25%) ( 9,500) Savings from repairs ( 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 P 500,000 Rental deposits 200,000 Accounts receivable (P9M x 1/3 x 2/3) 2,000 000 Inventory 400,000 Cash 120,000 Net cost of investment for decision analysis P5,020,000
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This Accounting Materials are brought to you by www.everything.freelahat.com [Problem 5] 1. Sales P6,000,000 Materials ( 800,000) Labor ( 1,200,000) Factory overhead ( 540,000) Selling and administrative expenses ( 700,000) Depreciation expense (P1,200,000 ÷ 5 yrs) ( 240,000) Income before income tax 2,520,000 Tax (30%) ( 756,000) Net income 1,764,000 Add back: Depreciation expense 240,000 2. Annual net cash flows P2,004,000 [Problem 6] 1. Weighted Average Cost of Capital (WACOC) = ? Sources of capital Market values Individual Cost of  Capital Mix  WACOC     Capital Fraction   Mortgage bonds (P300,000 x 105%) = P315,000 (10% x 55%) = 5.5% 315 / 1.007 1.72% 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 P1,007,000 11.55% Preferred dividends  =  12% x P100  =  P12 / sh Earnings per share  =  P75,000 / 50,000 sh  =  P1.50 2. Proposed Investment ROI WACOC Advise A 7% 11.55% Reject B 10% 11.55% Reject C 14% 11.55% Accept Investments are to be accepted if the WACOC is higher than the ROI. [Problem 7]
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This Accounting Materials are brought to you by www.everything.freelahat.com 1. New WACOC = ? Cost of Package 1 Package 2 Package 3 Sources of  Money Capital Amount WACOC Amount WACOC Amount WACOC Long-term  debt 6% P10,000,000 3% P  2,000 000 0.60% P  6,000,000 1.80% Preferred  equity 11% 3,000,000 1.65%   11,000 000 6.05% 5,000,000 2.75% Common  equity 14% 7,000,000 4.90% 7,000,0 00 4.90% 9,000,000 6.30%         Total P20,000,000 9.55% P20,000,000 11.55% P20,000,000 10.85% 2. Package 1 gives the invest WACOC at 9.55%. [Problem 8] Before Bonds Retirement After Bonds Retirement Amount WACOC Amount WACOC Bonds P  5,000,000 (8% x 60% x 5/10) = 2.4% P4,000,000 (8% x 60% x 4/10) = 1.92% Preferred  equity 1,000,000  (9% x 1/10)           =  0.9%              1,00 0,000  (9% x 1/10)            =  0.90% Common  equity 4,000,000  (12.5% x 4/10)       = 5%              4,00 0,000   (12.5% x 4/10)       =  5.0%  Lease               1,00 0,000  10% x 60% x 1/10) =  0.60%       Totals P10,000,000 8.30% 10,000,000 8.42% [Problem 9] a. WACOC = ?
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This note was uploaded on 08/26/2010 for the course DOA 506 taught by Professor Kim during the Spring '10 term at University of Santo Tomas.

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Chapter-14 - This Accounting Materials are brought to you by www.everything.freelahat.com CHAPTER 14 CAPITAL BUDGETING[Problem 1 Purchase price

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