MODULE 7 – SHORT-TERM SOURCES FOR FINANCING CURRENT ASSETS
Name: __________________________________ Course/Yr/Sec: _______ Score: _______
Department: _____________________________ Professor: ________________________
Problem 1.
Ready Flashlights, Inc. needs P300,000 to take a cash discount of 2/10, net 70. A banker will loan
the money for 60 days at an interest cost of P5,500.
Required:
a. What is the effective rate on the bank loan?
b. How much would it cost (in percentage terms) if the firm did not take the cash discount,
but paid the bill in 70 days instead of 10 days?
c. Should the firm borrow the money to take the discount?
d. If the banker requires a 20 percent compensating balance, how much must the firm
borrow to end up with the P300,000?
Problem 2.
Epoch Record Company is negotiating with two banks for a P100,000 loan.
Trust Bank requires a 20 percent compensating balance, discounts the loan, and wants to be paid
back in four quarterly payments. Northeast bank requires a 10 percent compensating balance, does
not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for
both banks is 9 percent. Compensating balances will be subtracted from the P100,000 in
determining the available funds in part a.
Required:
a. Which loan should Epoch accept?
MODULE 8 – LONG-TERM INVESTMENT DECISIONS
Name: __________________________________ Course/Yr/Sec: _______ Score: _______
Department: _____________________________ Professor: ________________________
Problem 1.
What is the payback period for the following set of cash flows?
Year Cash Flow
0 -P6,400
1 1,600
2 1,900
3 2,300
4 1,400
Problem 2.
An investment project has an annual cash inflows of P42,000, P53,000, P61,000, and P74,000,
and a discount rate of 14 percent. What is the discounted payback period for these cash flows if
the initial cost if P70,000?
Problem 3.
You are trying to determine whether to expand your business by building a new manufacturing
plant. The plant has an installation cost of P15 million which will be depreciated straight-line to
zero over its four-year life. If the plant has projected net income of P1,938,200; P2,201,600;
P1,876,000; and P1,329,500 over these four years, what is the project’s average rate of return
(ARR?)
Problem 4
A firm evaluate all of its projects by applying the IRR rule. If the require return is 16 percent,
should the firm accept the following project?
Year Cash Flow
0 -P34,000
1 16,000
2 18,000
3 15,000
Problem 5
A project that provides annual cash flows of P28,500 for nine years costs P138,000 today. Is this
a good project if the required return is 8 percent?
Problem 6
6.1 What is the IRR of the following set of cash flows?
Year Cash Flow
0 -P19,500
1 9,800
2 10,300
3 8,600
6.2 What is the NPV at a discount rate of zero percent?
6.2 What is the NPV if the discount rate is 10 percent?
Problem 7
Ethan Company is trying to estimate the first-year cash flow (at Year 1) for a proposed project.
The financial staff has collected the following information on the project:
Sales revenues P10 million
Operating costs (excluding depreciation) 7 million
Depreciation 2 million
Interest expense 2 million
The company has a 40% tax rate.
Required: What is the project’s cash flow for the first year (t=1)?