Bacani, Christian Kyle B.

BSA41

REQUIREMENT A
Year
1 2 3
Saving in fleet costs 10% $ 250,000.00 $ 275,000.00 $ 302,500.00
Less: Driver's Costs $ (33,000.00) $ (35,000.00) $ (36,000.00)
Repairs & Maintenance $ (8,000.00) $ (13,000.00) $ (15,000.00)
Other Costs (net of depreciation*) $ (10,000.00) $ (15,000.00) $ (20,000.00)
Net Savings $ 199,000.00 $ 212,000.00 $ 231,500.00

REQUIREMENT B
(i) Payback 3.00
Initial Cost of Investment $ 750,000.00
Less: Net Savings (y1 to y3) $ (642,500.00) $ 107,500.00
divide: y4 Net Savings $ 262,750.00 0.41
Payback Period 3.41

(ii) Savings for 5 years $ 1,191,275.00 Initial Outlay

Less: Accumulated Depreciation $ (600,000.00)
Profit $ 591,275.00 Scrap Value
divide: number of years 5
Average Profit $ 118,255.00 Average Investment

Average profit $ 118,255.00

divide: Average investment $ 450,000.00
Accounting Rate of return 26.3%

12%
(iii) Year Cost PV Factor Present value
0 $ (750,000.00)
1 $ 199,000.00 0.8929 $ 177,678.57
2 $ 212,000.00 0.7972 $ 169,005.10
3 $ 231,500.00 0.7118 $ 164,777.13
4 $ 262,750.00 0.6355 $ 166,982.38
$ 286,025.00 0.5674 $ 162,298.27
5
$ 150,000.00 0.5674 $ 85,114.03
Net Present Value $ 175,855.47

REQUIREMENT C
The proposed project resulted to a higher NPV, a longer payback period, and a lower ARR. It is much accurate to l
NPV since it takes into account the time value of money unlike payback and ARR. Moreover, it signifies that the in
cash inflows than the alternative because it has a higher NPV as compared to the alternative project.

Another disadvantage of ARR is that it can be manipulated easily by changes in the depreciation methods.
On the other hand, one of payback's disadvantage is that it gives much greater weight on cash flows at the
beginning of the period.
 Year *Cost of Transport fleet $ 750,000.00
4 5 Less: Salvage value $ (150,000.00)
$ 332,750.00 $ 366,025.00 Depreciable Cost $ 600,000.00
$ (38,000.00) $ (40,000.00) divide: useful life 5
$ (16,000.00) $ (18,000.00) Annual Depreciation $ 120,000.00
$ (16,000.00) $ (22,000.00)
$ 262,750.00 $ 286,025.00 $ 1,191,275.00

years

$ 750,000.00
1/2 $ 375,000.00
$ 150,000.00
1/2 $ 75,000.00
erage Investment $ 450,000.00

It is much accurate to look at

er, it signifies that the investment will produce much larger
ve project.

ciation methods.
cash flows at the
Bacani, Christian Kyle B.
BSA41
10% 10%
Year Project A Project B Difference PV Factor
0 $ (1,000.00) $ (10,000.00) $ (9,000.00)
1 $ 240.00 2,300.00 $ 2,060.00 0.9091
2 $ 288.00 2,640.00 $ 2,352.00 0.8264
3 $ 346.00 3,040.00 $ 2,694.00 0.7513
4 $ 414.00 3,500.00 $ 3,086.00 0.6830
5 $ 498.00 4,020.00 $ 3,522.00 0.6209
NPV $ 308.14 1,443.4 $ 1,135.24
IRR 20% 15% 14%

With the use of IRR, it ranks Project A higher than Project B. On the other hand, using NPV as basis
it ranks Project B higher than Project A. If both are mutually exclusive projects and we had only taken into accoun
we will be mislead to choose project A.

To compare projects with unequal investments, it is necessary to consider the excess funds (9,000 in this analysi
and how it will be utilized. If it is to be invested and will earn the 1,135.24, then it is also desirable to choose proj

However, when IRR is used to rank projects, NPV will not be maximized. NPV is the best measure that is why we s
using it as basis.
ad only taken into account the IRR of both projects,

nds (9,000 in this analysis)

desirable to choose project A.

measure that is why we should rank projects

Bacani, Christian Kyle B.
BSA41
YEAR
a. 1 2
Opening balance $ 10,000,000.00 $ 7,500,000.00
Writing Down Allowance 25% $ 2,500,000.00 $ 1,875,000.00

Computation for Taxes Payable

Sales $ 8,750,000.00 $ 12,250,000.00
Less: Materials $ 1,340,000.00 $ 1,875,000.00
Labour $ 2,675,000.00 $ 3,750,000.00
Overheads $ 185,000.00 $ 250,000.00
Profit before Depreciation $ 4,550,000.00 $ 6,375,000.00
Capital Allowance $ 2,500,000.00 $ 1,875,000.00
Taxable Profit $ 2,050,000.00 $ 4,500,000.00
Taxes 30% $ 615,000.00 $ 1,350,000.00
Profit after Tax $ 1,435,000.00 $ 3,150,000.00

YEAR
1 2
inflow Sales $ 8,750,000.00 $ 12,250,000.00
outflows Less: Materials $ (1,340,000.00) $ (1,875,000.00)
Labour $ (2,675,000.00) $ (3,750,000.00)
Overheads $ (185,000.00) $ (250,000.00)
Working capital recovery
Payment of Corporate Tax $ (615,000.00)
Net Cash Flow $ 4,550,000.00 $ 5,760,000.00
Discount factor 17% 0.8547 0.7305
Discounted Cash Flow $ 3,888,888.89 $ 4,207,758.05

Cumulative Discounted Cash Flows $ 13,984,915.92

Less: Capital Expenditure (equipment cost) $ 10,000,000.00
Working Capital $ 1,000,000.00 $ 11,000,000.00
NPV $ 2,984,915.92

b. the project should be accepeted because it yields a positive NPV.

c. The taxable profits is based on profit before depreciation and after capital allowance which is 25% of its opening bal
At the end of the term of project, the claim for a balancing allowance is available to ensure that the net cost of the a
has been allowed as a deductible expense over the project's life. In addition to that, the problem also specifies that
d. the use of NPV is based on cashflows whereas the given projections uses accrual method in which will result to temp
Moreover, the projection ignores the essence of time value of money and also considers interest payments. Interest
are not included in NPV analysis since it may resultto double counting.
 YEAR
3 4
$ 5,625,000.00 $ 4,218,750.00
$ 1,406,250.00 $ 4,218,750.00

$ 13,300,000.00 $ 14,350,000.00
$ 2,250,000.00 $ 2,625,000.00
$ 4,500,000.00 $ 5,250,000.00
$ 250,000.00 $ 250,000.00
$ 6,300,000.00 $ 6,225,000.00
$ 1,406,250.00 $ 4,218,750.00
$ 4,893,750.00 $ 2,006,250.00
$ 1,468,125.00 $ 601,875.00
$ 3,425,625.00 $ 1,404,375.00

YEAR
3 4 5
$ 13,300,000.00 $ 14,350,000.00
$ (2,250,000.00) $ (2,625,000.00)
$ (4,500,000.00) $ (5,250,000.00)
$ (250,000.00) $ (250,000.00)
$ 1,000,000.00
$ (1,350,000.00) $ (1,468,125.00) $ (601,875.00)
$ 4,950,000.00 $ 5,756,875.00 $ (601,875.00)
0.6244 0.5337 0.4561
$ 3,090,634.25 $ 3,072,156.62 $ (274,521.90) $ 13,984,915.92

e which is 25% of its opening balance.

ensure that the net cost of the asset
the problem also specifies that the tax is payable 1 year after year-end.
ethod in which will result to temporary differences between accounting treatment and tax treatment.
ders interest payments. Interest payments