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9OUR Directions: Evaluate the following projects. Which is the best among them using the different tools in capital budgeting? UNDERSFANDING Project Cash outlay A В Use the following tools to make your P1,000,000 P880,000 P920,000 decisions: 1. Payback period 2. Net present value 3. Accounting rate of return 4. Profitability index Net Cash inflow Year 1 310,000 200,000 290,000 Year 2 310,000 220,000 280,000 Year 3 310,000 250,000 300,000 Year 4 310,000 180,000 250,000 Year 5 295,000 195,000 80,000 310,000 90,000 Year 6 310,000 90,000 Salvage value 70,000 Discount rate 10% 8% 12% Economic life 4 years 5 years 6 years

9OUR Directions: Evaluate the following projects. Which is the best among them using the different tools in capital budgeting? UNDERSFANDING Project Cash outlay A В Use the following tools to make your P1,000,000 P880,000 P920,000 decisions: 1. Payback period 2. Net present value 3. Accounting rate of return 4. Profitability index Net Cash inflow Year 1 310,000 200,000 290,000 Year 2 310,000 220,000 280,000 Year 3 310,000 250,000 300,000 Year 4 310,000 180,000 250,000 Year 5 295,000 195,000 80,000 310,000 90,000 Year 6 310,000 90,000 Salvage value 70,000 Discount rate 10% 8% 12% Economic life 4 years 5 years 6 years

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Note: You can use the Payback period only

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YOUR UNDARSIANDING Directions: Evaluate the following projects. Which is the best among them using the different tools in capital budgeting? Use the following tools to make your Project Cash outlay A В P920,000 decisions: P1,000,000 310,000 P880,000 1. Payback period 2. Net present value 3. Accounting rate of return 4. Profitability index Net Cash inflow Year 1 200,000 290,000 Year 2 310,000 220,000 280,000 Year 3 310,000 250,000 300,000 Year 4 310,000 180,000 250,000 Year 5 310,000 90,000 295,000 Year 6 310,000 90,000 195,000 Salvage value 70,000 80,000 Discount rate 10% 8% 12% Economic life 4 years 5 years 6 years
Transcribed Image Text:YOUR UNDARSIANDING Directions: Evaluate the following projects. Which is the best among them using the different tools in capital budgeting? Use the following tools to make your Project Cash outlay A В P920,000 decisions: P1,000,000 310,000 P880,000 1. Payback period 2. Net present value 3. Accounting rate of return 4. Profitability index Net Cash inflow Year 1 200,000 290,000 Year 2 310,000 220,000 280,000 Year 3 310,000 250,000 300,000 Year 4 310,000 180,000 250,000 Year 5 310,000 90,000 295,000 Year 6 310,000 90,000 195,000 Salvage value 70,000 80,000 Discount rate 10% 8% 12% Economic life 4 years 5 years 6 years
Payback Period – the length of time required for an investment to recover its initial outlay in terms of profits or savings. The longer the payback period, the higher the risk. Decision Rule: If: PB period s maximum allowed PB period; Accept If: PB period > maximum allowed PB period; Reject Note: the maximum allowed PB period is determined by the management. Ex 1. You bought a machine costs P100,000. Using this machine, the productivity of your products increases which resulted into additional net profit of P30,000 per year. What is the payback period? Option 1: Manual computation If the net profit is uneven, Net investment P100,000 Net investment P100,000 Cash return Yr1 30,000 70,000 Cash return Yr1 35,000 65,000 Yr2 30,000 40,000 Yr2 25,000 40,000 Yr3 30,000 10,000 Yr3 22,000 18,000 Yr4 30,000 Yr4 28,000 PB = 3 years + 10,000/30,000 = 3.33 years or 3 years and 4 months Use this formula if the net profit/net cash flow is the PB = 3 years + 18,000/28,000 = 3.64 years or 3 years and 8 months same every year. If the maximum allowed PB period is 4 years, Option 2: Formula: PB = Net investment accept; if less that 4 years, reject. Annual Cash return 100,000 PB = = 3.33 years or 3 years and 4 months 30,000
Transcribed Image Text:Payback Period – the length of time required for an investment to recover its initial outlay in terms of profits or savings. The longer the payback period, the higher the risk. Decision Rule: If: PB period s maximum allowed PB period; Accept If: PB period > maximum allowed PB period; Reject Note: the maximum allowed PB period is determined by the management. Ex 1. You bought a machine costs P100,000. Using this machine, the productivity of your products increases which resulted into additional net profit of P30,000 per year. What is the payback period? Option 1: Manual computation If the net profit is uneven, Net investment P100,000 Net investment P100,000 Cash return Yr1 30,000 70,000 Cash return Yr1 35,000 65,000 Yr2 30,000 40,000 Yr2 25,000 40,000 Yr3 30,000 10,000 Yr3 22,000 18,000 Yr4 30,000 Yr4 28,000 PB = 3 years + 10,000/30,000 = 3.33 years or 3 years and 4 months Use this formula if the net profit/net cash flow is the PB = 3 years + 18,000/28,000 = 3.64 years or 3 years and 8 months same every year. If the maximum allowed PB period is 4 years, Option 2: Formula: PB = Net investment accept; if less that 4 years, reject. Annual Cash return 100,000 PB = = 3.33 years or 3 years and 4 months 30,000
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