Republic of the Philippines
BATANGAS STATE UNIVERISTY
BatStateU Rosario
Namunga, Rosario, Batangas
Exercises in Capital Investment
Name: Carla Jane P. Andal
Section: FINMGT-1201
PROBLEM 1
The cost of a project is Php 50,000 and it generates cash inflows of Php20, 000,
Php15, 000, Php25, 000, and Php10, 000 over four years.
Required: Using the present value index method, appraise the profitability of the proposed
investment, assuming a 10% rate of discount. (NPV)
YEAR
0
1
2
3
4

CASH FLOW
-50,000
20,000
15,000
25,000
10,000
DISCOUNT FACTOR
PRESENT VALUE
1
-50000
0.9091
+18,181.82
0.826
+12,396.69
0.751
+18,782.87
0.683
+6,830.13
NET PRESENT VALUE :
+6,191.52
*DISCOUNT FACTOR IS 10%.
What will be the decision? Why?
I will accept the project since the computations show that the project earnings generated
by a project or investment in current dollars surpass the predicted costs. An investment with a
positive net present value of Php 6,191.52 is believed to be profitable over a four-year period. As
a result, it indicates that the investment will raise the firm’s value and maximize shareholder
wealth.
PROBLEM 2
A company is considering whether to purchase a new machine. Machines A and B are available
for P80,000 each. Earnings after taxation are as follows:
Year
1
2
3
Machine A
Php
24,000
32,000
40,000
Machine B
Php
8,000
24,000
32,000
4
5
24,000
16,000
48,000
32,000
Required: Evaluate the two alternatives using the following: (a) payback method, (b) net present
value method. You should use a discount rate of 10%.
A. PAYBACK METHOD
MACHINE A
Year
1
2
3
4
5
CAPITAL
INVESTMENT
CASH
FLOW
Php
80,000
Php
24,000
32,000
40,000
24,000
16,000
NET
INVESTMENT
REMAINING
Php
56,000
24,000
1 year
1 year
0.6 year
(1+1+0.6) 2.6 years
(0.6 *12 months) 7.2
years
(7.2 * 30 days) 216 days
2 years and 216 days or
2.6 years
MACHINE B
YEAR
1
2
3
4
5
CAPITAL
INVESTMENT
Php
80,000
CASH FLOW
Php
8,000
24,000
32,000
48,000
32,000
NET INVESTMENT
REMAINING
Php
72,000
48,000
16,000
1 year
1 year
1 year
0.33 year
(1+1+1+0.33) 3.33
year
(0.33 * 12 months)
3.96 months
(3.96 * 30 days) 118.8
days
3 years and 118.8
days or 3.33 years
B. NET PRESENT VALUE
MACHINE A
YEAR
CASH FLOW
DISCOUNT
FACTOR
PRESENT VALUE
Php
Php
0
-80,000
1
-80000
1
24,000
0.9091
+21,818.18
2
32,000
0.826
+26,446.28
3
40,000
0.751
+30,052.59
4
24,000
0.683
+16,392.32
5
16,000
0.621
+9,934.74
NET PRESENT VALUE :
+24,644.12
*DISCOUNT FACTOR IS 10%
MACHINE B
YEAR
CASH FLOW
0
1
2
3
4
5
Php
-80,000
8,000
24,000
32,000
48,000
32,000
DISCOUNT
FACTOR
1
0.9091
0.826
0.751
0.683
0.621
NET PRESENT
VALUE:
PRESENT VALUE
Php
-80,000
+7272.73
+19834.71
+24042.07
+32784.65
+19869.48
+23,803.64
*DISCOUNT FACTOR IS 10%
Which machine needs to purchase and why?
Machine A should be purchased because it makes a higher net present value than Machine
B. As shown in the tables, Machine A has a net present value of Php 24,644.12 whereas machine
B has Php 23, 803.64. We can say that Machine A has a higher present value because of the
computation’s result. In payback period, Machine A will be give back after 2.6 years or 2 years and
216 days, whereas Machine B will be give back after 2.6 years or 2 years and 216 days. As a result,
purchasing Machine A is sensible decision because it yields a high net present value and has a
shorter payback period than Machine B, despite the fact that both require a Php 80,000 capital
investment.
PROBLEM 3
Compute the (1) net present value and (ii) internal rate of return of the following capital
budgeting projects. The firm’s required rate of return is 12 percent.
Year
Zeta
(Php 50,000)
20,000
15,000
30,000
0
1
2
3
I.
Projects
Omega
(Php 45,000)
42,000
9,000
1,850
NET PRESENT VALUE
ZETA
YEAR
CASHFLOW
0
1
2
3
Php
-50,000
20,000
15,000
30,000
DISCOUNT
FACTOR
PRESENT VALUE
1
0.893
0.79719
0.712
NET PRESENT VALUE :
Php
-50000
+17,857.14
+11,957.91
+21,353.41
+1,168.46
*DISCOUNT FACTOR IS 12%
OMEGA
YEAR
0
1
2
3
CASHFLOW
Php
-45,000
42,000
9,000
1,850
DISCOUNT FACTOR
1
0.893
0.79719
0.712
NET PRESENT VALUE:
*DISCOUNT FACTOR IS 12%
PRESENT VALUE
Php
-45,000
+37,500
+7,174.74
+1,316.79
+991.54
II.
INTERNAL RATE OF RETURN
ZETA
YEAR
CASHFLOW
PRESENT VALUE
0.132605
Php
Php
Php
-50,000.00
20,000.00
15,000.00
30,000.00
NET PRESENT VALUE:
IRR:
*THE ACTUAL IRR IS 13.26%
-50000
+17,857.14
+11,957.91
+21,353.41
+1,168.46
13.26%
0
1
2
3
-50,000.00
17,658.41
11,693.23
20,648.37
0.14
OMEGA
YEAR
CASHFLOW
PRESENT VALUE
0.140335
Php
Php
Php
0
-45,000.00
-50000
-50,000.00
1
42,000.00
+37,500
17,658.41
2
9,000.00
+7,174.74
11,693.23
3
1,850.00
+1,316.79
20,648.37
NET PRESENT VALUE :
IRR:
+991.54
0.16
14.03%
*THE ACTUAL IRR IS 13.26%

Which project should be purchased? Explain why?
The Zeta Project is the one that should be purchased because it has a high Net Present
Value. When comparing the two projects, the Zeta Project has a larger NPV than the Omega
Project. Omega, on the other hand, generates a larger IRR than Zeta. When faced with a difficult
decision between two competing projects, it is advisable to choose the one with a higher positive
net value by utilizing a cutoff rate or a suitable cost of capital. In addition, the discount rate can be
changed to represent a variety of factors, such as market risk, which is an advantage of NPV. Net
Present value is a better tool for deciding on future investments because it delivers a dollar return.
While, IRR is less effective when making investment decisions because its results do not indicate
how much money a project is anticipated to generate.