Exercise 1: METHODS THAT DO NOT CONSIDER TIME VALUE OF MONEY

Two investment proposals have been made and the following data thereon are given:

Project ALPHA Project BETA

Investment 123,417 155,934

Depreciable assets included in the investment figure 60,000 72,000

Economic life 8 years 12 years

Annual sales revenue 65,000 78,000

Annual out-of-pocket operating cost 36,000 42,500

Income tax rate 35%

Cost of capital 10%

Determine which proposal is the better one based on:

a.Payback period

b.Payback reciprocal

c.Accounting rate of return

d.Average rate of return

e.Internal rate of return

f.Net present value

g.Profitability index

h.Discounted payback period

Exercise 2: PAYBACK BAILOUT PERIOD

Two investment proposals are under review. The following figures are given:

Project X Project Y

Investment P92,000 P92,000

Year Cash Returns Salvage Value Cash Returns Salvage Value

1 20,000 40,000 8,000 15,000

2 22,000 30,000 12,000 10,000

3 25,000 25,000 18,000 5,000

4 30,000 10,000 16,000 2,000

5 28,000 5,000 10,000 1,000

Estimate the payback bailout period for each proposal. Assume that salvage value remains constant during the particular year for which it is given.