Reference no: EM132539660

Question 1: BTS Company, engaged in selling bottled water, is evaluating two possible investments:

Investment 1: Delivery Truck

Acquisition Cost P570,000

Useful Life 6 years

The truck can deliver an additional 150,000 bottles of water per year. The contribution margin per bottle is P2.00. The acquisition of the new truck will cause an increase in fixed operating costs, excluding depreciation of P5 per kilometer. The truck is expected to run at 20,000 kilometers per year.

Investment 2: Bottling Machine

Acquisition Cost P450,000

Useful Life 6 years

The use of the new bottling machine would enable the company to save labor time by 20 hours per day. The labor rate per hour is P40 and there are 280 operating days in a year.

For capital investment projects, the company's minimum desired rate of return is 10%. The company pays income tax at 32% of income before tax.

Which project has a shorter payback period?

a. Delivery Truck, by 0.87 year

b. Bottling Machine, by 0.87 year

c. Deliver Truck, by 2.55 years

d. Bottling Machine, by 3.42 years

Question 2: Using the same information in No. 1, which project has a higher net present value

a. Delivery Truck, by P163,200

b. Bottling Machine, by P163,200

c. Delivery Truck, by P317,870

d. Bottling Machine, by P154,670

Question 3: If an investment project has a profitability index of 1.25, the project's

a. Cost of capital is greater than its internal rate of return

b. Discounted cash flow rate of return is 25%

c. Net present value is positive, meaning that the present value of cash inflows is greater than the present value of the cash outflows.

d. Time-adjusted rate of return is greater than its internal rate of return.