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
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
I included the formula and solution on our module for refence
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
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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