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7/21/2019 MCQ InvestAppraisal
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Revision 2 – Investment Appraisal
Topics List
1. Investment Appraisal Methods Exam QuestionReference
a. Payback period
Computation & comment
Advantages and disadvantages
Discounted payback period Jun 09
Jun 11
Q2b
Q1c
b. Accounting rate o return !A""#
Computation & comment Pi$ot
Jun 09
Dec 12
Q%b
Q2b
Q1b
Advantages and disadvantages
c. et present va$ue !P'#
Computation & comment Jun 09
Dec 10
Q2b
Q1a(b
Advantages and disadvantages
d. )nterna$ rate o return !)""#
Computation & comment Dec 0*
Jun 0+
Jun 09
Q2b
Q%b
Q2b
Dec 11 Q1b
Advantages and disadvantages Pi$ot
Jun 10
Q%c
Q,c
2. ta!es in "apital Investment #ro$ects Jun 09 Q2a
%. &etermination of relevant and non'relevant cash flo(s
). Allo(in! for Tax* Inflation and +or,in! "apital
a. )n$ation
-peciic in$ation and genera$ in$ation Pi$ot
Jun 0+
Jun 09
Dec 10
Jun 11
Jun 12
Q%a
Q%a
Q2b
Q1a
Q1a
Q1a
22
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Dec 12
Jun 1,
Dec 1,
Jun 1%
Q1a
Q1a
Q1a
Q1a
"ea$ and money interest rate /isers euation Pi$ot
Jun 10
Jun 1,
Dec 1,
Q%a
Q,b
Q1b
Q1b
b. 3a4ation Pi$ot
Dec 0*
Jun 0+
Dec 0+
Jun 10
Dec 10
Jun 11
Q%a
Q2a
Q%a
Q,b
Q,b
Q1a
Q1a
Dec 11
Jun 12
Dec 12
Jun 1,
Dec 1,
Jun 1%
Q1a
Q1a
Q1a
Q1a
Q1a(b
Q1a
c. 5orking capita$ Jun 0+
Dec 0+
Jun 11
Q%a
Q,b
Q1a
Dec 11
Jun 1,
Dec 1,
Q1a
Q1a
Q1a(b
-. #ro$ect Appraisal and Ris,
a. "isk and uncertainty Dec 0*Jun 11
Q2cQ1c
b. Probabi$ity ana$ysis Dec 0*
Jun 11
Jun 12
Q2c
Q1c
Q1c
c. -ensitivity ana$ysis Dec 0*
Jun 11
Q2c
Q1c
Dec 11
Jun 12
Q1c
Q1c
2,
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d. -imu$ation
e. "isk6ad7usted discount rate Jun 10
Jun 11
Q,c!iii#
Q1c
. Asset Investment &ecisionsa. 8ease or buy
umerica$ ana$ysis Dec 09
Dec 1,
Q1a(b
Q%a
/inance $ease meaning
perating $ease meaning
Attractions o inance $ease Dec 1, Q%b
Attractions o operating $ease Dec 1, Q%b
b. Asset acuisition by P' Pi$ot
Dec 0*
Jun 0+
Dec 0+
Q%a
Q2a
Q%a
Q,b
c. "ep$acement cyc$es Dec 09
Jun 10
Jun 12
Q1b
Q,c
Q1b
d. Capita$ rationing
:ard !e4terna$# and sot !interna$# capita$ rationing Dec 11
Jun 1%
Q1d
Q1c
-ing$e period capita$ rationing Dec 09 Q1d
Dec 11
Jun 1%
Q1d
Q1b
;u$ti6period capita$ rationing
2%
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"hapter ) "apital /ud!etin! and /asic Investment Appraisal Techni0ues
I. #aac, period and 3#4
1. -teeperton p$c is committed to ma4imising te <ea$t o its sareo$ders.
=iven tis ob7ective( <ic one o te o$$o<ing metods o investment appraisa$ is
most appropriate or te company to use>
A 3et present value
? )nterna$ rate o return
C Payback period
D Accounting rate o return
2. 'irunga Co uses te net present va$ue !P'# metod( te interna$ rate o return !)""#
metod and discounted payback period !DPP# to appraise its ne< investment
opportunities. An investment opportunity <as recent$y appraised using eac o tese
metods and <as estimated to provide a positive P' o @10B mi$$ion( an )"" o 1B
and a DPP o tree years. /o$$o<ing tis appraisa$( it <as discovered tat te cost o
capita$ o te company <as $o<er tan ad been previous$y estimated.
5at <ou$d be te eect !increasedecreaseno eect# on te igures provided by eac
investment appraisa$ metod o taking account o te $o<er cost o capita$>
3#4 IRR &##
A )ncrease )ncrease Decrease
? )ncrease o eect Decrease
C Decrease o eect )ncrease
D o eect Decrease o eect
,. 5ic E o te o$$o<ing metods o investment appraisa$ is consistent <it te
ob7ective o sareo$der <ea$t ma4imisation>
A et present va$ue
? )nterna$ rate o return
C Accounting rate o return
D Payback period
2B
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%. A company is considering a pro7ect or investment <ic <i$$ cost @*0(000 no< and
anoter @10(000 in year ive. 3e company as a cost o capita$ o +. 3e pro7ect as
te o$$o<ing discounted cas $o<sF
5ear &iscounted cash flo(s
@
1 2,(1%+
2 ,0(00*
, 19(+%G
% 1%(*01
5at is its discounted payback period in years and monts !to te nearest mont#>
A 2 years( 10 monts
? , years( 1 mont
" % ears* % months
D , years( G monts
B. 3e payback period is te number o years tat it takes a business to recover its origina$
investment rom net returns( ca$cu$ated
A beore bot depreciation and ta4ation
? beore deprecation but ater ta4ation
C ater deprecation but beore ta4ation
D ater bot depreciation and ta4ation
II. Internal rate of return
G. 3e net present va$ue o a proposed pro7ect is @20(000 at a discount rate o B and!@2+(000# at 10.
+hat is the internal rate of return of the pro$ect* to the nearest one decimal place6
A *.1
? *.B
C 2.,
D +.G
2G
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*. 3e net present va$ue o a proposed pro7ect is a positive @BG(000 at a discount rate o
10 and a negative @2+(000 at 20.
5at is te interna$ rate o return o te pro7ect( to te nearest <o$e percentage>
A 178
? 1,
C ,0
D +
+. -tatement 1F -imp$e payback period takes into account te time va$ue o money and
uses cas $o<s rater tan proits.
-tatement 2F )nterna$ rate o return takes into account te time va$ue o money and uses
cas $o<s rater tan proits.
5ic o te above statements isare true>
A -tatement 1 on$y
? -tatement 2 on$y
C ?ot statement 1 and statement 2
D eiter statement 1 nor statement 2
9. -onoran Co recent$y eva$uated an investment pro7ect tat ad an initia$ cas out$ay
o$$o<ed by positive annua$ net cas $o<s over its $ie. 3e company emp$oyed te
interna$ rate o return !)""# and discounted payback period !DPP# metods or te
investment appraisa$. 8ater( it <as discovered tat te cost o capita$ igure used <as
incorrect and tat te correct igure <as iger.
5at <i$$ be te eect on te )"" and DPP o correcting or tis error>
Effect on
IRR &##
A o cange o cange
? )ncrease )ncrease
C Decrease Decrease
& 3o chan!e Increase
2*
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10. ;aia p$c is considering investing in t<o competing pro7ectsF De$ta and =amma. De$ta
as a net present va$ue !P'# o @1G(B00 and an interna$ rate o return !)""# o 1*.
Detai$s o te estimated cas $o<s o =amma are as o$$o<sF
@000
Cas $o<s
Hear 0 !200#
Hear 1 120
Hear 2 G0
Hear , +0
3e business as a cost o capita$ o 10.
5ic one o te o$$o<ing combinations is correct concerning te P' and )"" o te
t<o pro7ects>
&elta 9amma
A :iger P' :iger )""
/ :i!her 3#4 Lo(er IRR
C 8o<er P' :iger )""
D 8o<er P' 8o<er )""
11. Ca$cite 8td used te P' and )"" metods o investment appraisa$ to eva$uate a
pro7ect tat as an initia$ cas out$ay o$$o<ed by annua$ net cas in$o<s over its $ie.
Ater te eva$uation ad been undertaken( it <as discovered tat te cost o capita$ ad
been incorrect$y ca$cu$ated and tat te correct cost o capita$ igure <as in act iger
tan tat used.
5at <i$$ be te eect on te P' and )"" igures o correcting or tis error>
Effect on
3#4 IRR
A Decrease Decrease
? Decrease o cange
C )ncrease )ncrease
D )ncrease o cange
2+
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12. A business eva$uates an investment pro7ect tat as an initia$ out$ay o$$o<ed by annua$
net cas in$o<s o @10 mi$$ion trougout its ininite $ie. 3e eva$uation o te in$o<s
produced a present va$ue o @B0 mi$$ion and a proitabi$ity !present va$ue# inde4 o 20.
5at is te interna$ rate o return and initia$ out$ay o tis pro7ect>
5at is te interna$ rate o return and initia$ out$ay o tis pro7ect>
IRR ;8< Initial outla ;=m<
A 20 2B
? 20 100
C %0 2B
D 10 100
1,. "omer p$c used te )"" and discounted payback metods o investment appraisa$ to
eva$uate an investment proposa$ tat as an initia$ cas out$ay o$$o<ed by annua$ net
cas in$o<s over its $ie. /o$$o<ing tis eva$uation( it <as ound tat te cost o capita$
igure used <as incorrect and tat te correct igure <as $o<er.
5at <i$$ be te eect on te )"" and discounted payback period o correcting or tis
error>
Effect on
IRR fi!ure &iscounted paac, period
A o cange o cange
? )ncrease )ncrease
C Decrease Decrease
D o cange Decrease
1%. A?C Co <ises to undertake a pro7ect reuiring an investment o @*,2(000 <ic <i$$generate eua$ annua$ in$o<s o @1%G(%00 in perpetuity.
) te irst in$o< rom te investment is a year ater te initia$ investment( <at is te
)"" o te pro7ect>
A 20
? 2B
C %00
D B00
29
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1B. 5ic o te o$$o<ing are advantages o te interna$ rate o return !)""# approac to
investment appraisa$>
1 C$ear decision ru$e
2 3akes into account te time va$ue o money
, Assumes unds are re6invested at te )""
% Considers te <o$e pro7ect
A 1( 2 and % on$y
? 2( , and % on$y
C 2 and % on$y
D 1( 2 and , on$y
III. Accountin! rate of return
1G. 3e o$$o<ing statements about te dra<backs o te accounting rate o return !A""#
<ere made at a recent meetingF
1. A"" is based on accounting proits and not cas $o<s( and can cange because
proits are sub7ect to dierent possib$e treatments.
2. A"" on$y considers cas $o<s <itin a given time period and ignores cas $o<s
ater tat time period.
,. 5it te A"" metod @1 receivab$e today is <ort te same as a @1 in ive years.
3ereore it ignores te time va$ue o money.
5ic combination o te above statements is true>
A 1( 2 and ,? 1 and 2 on$y
" 1 and % onl
D 2 and , on$y
,0
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1*. A company purcases a non6current asset <it a useu$ economic $ie o ten years or
@1.2B mi$$ion. )t is e4pected to generate cas $o<s over te ten year period o @2B0(000
per annum beore depreciation. 3e company carges depreciation over te $ie o te
asset on a straigt6$ine basis. At te end o te period it <i$$ be so$d or @2B0(000.
5at is te accounting rate o return or te investment !based on average proits and
average investment#>
A 20
? 1B
C ,,
D 2B
1+. Consider te o$$o<ing statements concerning investment appraisa$ metods.
1. 3e accounting rate o return metod ignores te time va$ue o money.
2. 3e interna$ rate o return metod ignores te re$ative siIe o investments <en
ranking investment proposa$s.
,. 3e net present va$ue metod ignores te reuired returns rom investors <en
ranking investment proposa$s.
%. 3e payback metod ignores non6operating cas $o<s re$ating to an investment
proposa$ <en ca$cu$ating te payback period.
5ic t<o o te above statements are correct>
A 1 and 2
? 1 and ,
C 2 and %
D , and %
,1
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I4. Relevant cash flo(s
19. An accountant is paid @,0(000 per annum and spends t<o <eeks one mont <orking on
appraising pro7ect A$pa.
5y sou$d te accountant 3>T carge a$ is sa$ary to te pro7ect>
A ?ecause is sa$ary is sunk
? ?ecause is sa$ary is not incrementa$
C ?ecause is sa$ary is not a cas $o<
D ?ecause is sa$ary is an opportunity cost
20. E$ara p$c is considering an investment in a ne< process. 3e ne< process <i$$ reuire
an increase in stocks o @,0(000 during te irst year. 3ere <i$$ a$so be an increase in
debtors outstanding o @%0(000 and an increase o creditors outstanding o @,B(000
during te irst year. 3e ne< process <i$$ use macinery tat <as purcased
immediate$y beore te irst year o operations at a cost o @,00(000. 3e macinery is
depreciated using te straigt6$ine metod and as an estimated $ie o ive years and no
residua$ va$ue. During te irst year( te net operating proit beore depreciation rom
te ne< process is e4pected to be @1+0(000. 3e business uses te net present va$ue
metod <en eva$uating investment proposa$s.
5en undertaking te net present va$ue ca$cu$ations( <at <ou$d be te estimated net
cas $o< during te irst year o te pro7ect> !)gnore ta4ation#
A @+B(000
? @21B(000
C @1%B(000
D @1BB(000
,2
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21. ;erton p$c is current$y considering a ne< investment pro7ect and uses te P' metod
or appraisa$ purposes.
5ic one o te o$$o<ing items re$ating to te pro7ect sou$d be inc$uded in te P'
appraisa$>
A 3e payment o @,0(000 or a market researc report( <ic <as commissioned
$ast mont and <i$$ be paid or ne4t mont.
? 3e apportionment o i4ed costs o @10(000 per year over te $ie o te pro7ect to
represent a air sare o te tota$ i4ed costs o te actory.
C An oer o @100(000 to acuire ra< materia$s tat <ere due to be so$d but <ic
<i$$ be used in te pro7ect i it goes aead.
D A depreciation carge o @10(000 per year over te $ie o te pro7ect or
macinery tat <i$$ be used in te pro7ect.
22. 85 Co as a a$ empty actory on <ic it pays @B(000 pa. ) it takes on a ne< pro7ect(
it <i$$ ave to move to a ne< bigger actory costing @1*(000 pa and it cou$d rent te o$d
actory out or @,(000 pa unti$ te end o te current $ease.
5at is te renta$ cost to be inc$uded in te pro7ect appraisa$>
A @1%(000
? @1*(000
C @9(000
D @19(000
,,
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"hapter - &"? (ith Inflation and Taxation
I. Inflation
1. 5en appraising investment pro7ects using discounted cas $o< metods( t<o
approaces to dea$ing <it in$ation cou$d be used. 3ese areF
1. to e4c$ude in$ation rom te estimated uture cas $o<s and to app$y a discount
rate based on te money cost o capita$.
2. to inc$ude in$ation in te estimated uture cas $o<s and to app$y a discount
based on te rea$ cost o capita$.
5ic E o te o$$o<ing combinations !truea$se# concerning te above statements
is correct>
tatement 1 tatement 2
A 3rue 3rue
? 3rue /a$se
C /a$se 3rue
D /a$se /a$se
2. 3o dea$ <it te eect o in$ation <en appraising investment pro7ects( t<o possib$e
approaces can be used. 3ese areF
1. 3o e4c$ude in$ation rom te estimated uture cas $o<s and to app$y a discount
rate e4pressed in rea$ terms.
2. 3o ad7ust te estimated uture cas $o<s by te re$evant rates o in$ation and to
ad7ust te discount rate to re$ect current market rates.
5ic one o te o$$o<ing combinations is correct>
tatement 1 tatement 2
A 3rue 3rue
? 3rue /a$se
C /a$se 3rue
D /a$se /a$se
,%
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,. 3e one year rate o in$ation is e4pected to be ,0. 3e one year money rate o
interest is G,.
3e one year rea$ rate o interest isF
A ,,0
? ,20
C 9,0
D 9%9.
%. Dun$in p$c is e4amining an investment opportunity tat <i$$ $ead to savings in sta
costs. 3e company uses te net present va$ue metod o investment appraisa$ based on
cas $o<s e4pressed in rea$ terms. -ta costs are e4pected to rise at a rate o B eac
year( <ereas te genera$ rate o in$ation is e4pected to rise at a rate o , eac year.
3e company as a reuired rate o return o 10( assuming no in$ation.
5at is te appropriate discount rate to use <en eva$uating te investment
opportunity>
A 10
? 1,
C 1,,
D 1BB.
B. Consider te o$$o<ing statements.
5en using te net present va$ue metod o investment appraisa$( te reuired rate o
return rom investors is used as te appropriate discount actor. 3is rate o return
sou$d beF
!1# ca$cu$ated on an ater6ta4 basis
!2# e4pressed in rea$ terms i te cas $o<s are e4pressed in terms o te actua$
number o do$$ars to be received.
5ic one o te o$$o<ing combinations !truea$se# concerning te above statements
is correct>
,B
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tatement 1 tatement 2
A 3rue 3rue
? 3rue /a$se
C /a$se 3rue
D /a$se /a$se
G. A pro7ect consists o a series o cas out$o<s in te irst e< years o$$o<ed by a series
o positive cas in$o<s. 3e tota$ cas in$o<s e4ceed te tota$ cas out$o<s. 3e
pro7ect <as origina$$y eva$uated assuming a Iero rate o in$ation.
) te pro7ect <ere re6eva$uated on te assumption tat te cas $o<s <ere sub7ect to a
positive rate o in$ation( <at <ou$d be te eect on te payback period and te
interna$ rate o return>
#aac, IRR
A )ncrease )ncrease
? Decrease Decrease
C Decrease )ncrease
D )ncrease Decrease
*. -potty 8td p$ans to purcase a macine costing @1+(000 to save $abour costs. 8abour
savings <ou$d be @10(000 in te irst year and $abour rates in te second year <i$$
increase by 10. 3e estimated average annua$ rate o in$ation is 9 and te
companys rea$ cost o capita$ is estimated at 11. 3e macine as a t<o year $ie <it
an estimated actua$ sa$vage va$ue o @B(000 receivab$e at te end o year 2. A$$ cas
$o<s occur at te year end.
5at is te P' !to te nearest @10# o te proposed investment>
A @B0
? @2*0
C @,*0
D @1(%,0
,G
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+. A pro7ect as an initia$ out$o< at year 0 <en an asset is bougt( ten a series o
revenue in$o<s at te end o eac year( and ten ina$$y sa$es proceeds rom te sa$e o
te asset. )ts P' is @12(000 <en genera$ in$ation is Iero per year.
) genera$ in$ation <ere to be rise to * per year( and a$$ revenue in$o<s <ere sub7ect
to tis rate o in$ation but te initia$ e4penditure and resa$e va$ue o te asset <ere not
sub7ect to in$ation( <at <ou$d appen to te P'>
A 3e P' <ou$d remain te same
? 3e P' <ou$d rise
C 3e P' <ou$d a$$
D 3e P' cou$d rise or a$$
II. Taxation
9. A company as ,1 December as its accounting year end. n 1 January 201% a ne<
macine costing @2(000(000 is purcased. 3e company e4pects to se$$ te macine on
,1 December 201B or @,B0(000.
3e rate o corporation ta4 or te company is ,0. 3a46a$$o<ab$e depreciation is
obtained at 2B on te reducing ba$ance basis( and a ba$ancing a$$o<ance is avai$ab$e
on disposa$ o te asset. 3e company makes suicient proits to obtain re$ie or
capita$ a$$o<ances as soon as tey arise.
) te companys cost o capita$ is 1B per annum( <at is te present va$ue o te ta46
a$$o<ab$e depreciation at 1 January 201% !to te nearest tousand do$$ars#>
A @,91(000
? @2%+(000C @2G,(000
D @*19(000
,*
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10. Jones 8td p$ans to spend @90(000 on an item o capita$ euipment on 1 January 2012.
3e e4penditure is e$igib$e or 2B ta46a$$o<ab$e depreciation( and Jones pays
corporation ta4 at ,0. 3a4 is paid at te end o te accounting period concerned. 3e
euipment <i$$ produce savings o @,0(000 per annum or its e4pected useu$ $ie
deemed to be receivab$e every ,1 December. 3e euipment <i$$ be so$d or @2B(000 on
,1 December 201B. Jones as a ,1 December year end and as a 10 post6ta4 cost o
capita$.
5at is te present va$ue at 1 January 2012 o te ta4 savings tat resu$t rom te
capita$ a$$o<ances>
A @1,(1*0
? @1B(+2G
C @1G(01+
D @19(+2*
11. A company receives a perpetuity o @20(000 per annum in arrears( and pays ,0
corporation ta4 12 monts ater te end o te year to <ic te cas $o<s re$ate.
At a cost o capita$ o 10( <at is te ater ta4 present va$ue>
A @1%0(000
? @1%B(%G0
C @1%%(000
D @12*(2*%
III. Incorporatin! (or,in! capital
12. A pro7ect as te o$$o<ing pro7ected cas in$o<s.
Hear 1 100(000
Hear 2 12B(000
Hear , 10B(000
5orking capita$ is reuired to be in p$ace at te start o eac year eua$ to 10 o te
cas in$o< or tat year. 3e cost o capita$ is 10.
5at is te present va$ue o te <orking capita$>
,+
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A @ i$
? @!,0(0,G#
C @!2(*,B#
D @,,(000
1,. A5 Co needs to ave @100(000 <orking capita$ in p$ace immediate$y or te start o a 2
year pro7ect. 3e amount <i$$ stay constant in rea$ terms. )n$ation is running at 10 per
annum( and A5 Cos money cost o capita$ is 12.
5at is te present va$ue o te cas $o<s re$ating to <orking capita$>
A @!21(2G0#
? @!20(,00#
C @!10+(*,0#
D @!%(090#
Question 1 – 3#4* IRR and ARR (ith inflation
P' Co is eva$uating an investment proposa$ to manuacture Product 5,,( <ic as
perormed <e$$ in test marketing tria$s conducted recent$y by te companys researc and
deve$opment division. 3e o$$o<ing inormation re$ating to tis investment proposa$ as
no< been preparedF
)nitia$ investment @2 mi$$ion
-e$$ing price !current price terms# @20 per unit
E4pected se$$ing price in$ation , per year
'ariab$e operating costs !current price terms# @+ per unit
/i4ed operating costs !current price terms# @1*0(000 per year
E4pected operating cost in$ation %
3e researc and deve$opment division as prepared te o$$o<ing demand orecast as a
resu$t o its test marketing tria$s. 3e orecast re$ects e4pected tecno$ogica$ cange and its
eect on te anticipated $ie6cyc$e o Product 5,,.
5ear 1 2 % )
Demand !units# G0(000 *0(000 120(000 %B(000
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)t is e4pected tat a$$ units o Product 5,, produced <i$$ be so$d( in $ine <it te
companys po$icy o keeping no inventory o inised goods. o termina$ va$ue or
macinery scrap va$ue is e4pected at te end o our years( <en production o Product
5,, is p$anned to end. /or investment appraisa$ purposes( P' Co uses a nomina$ !money#discount rate o 10 per year and a target return on capita$ emp$oyed o ,0 per year.
)gnore ta4ation.
Re0uired@
!a# Ca$cu$ate te o$$o<ing va$ues or te investment proposa$F
!i# net present va$ue !B marks#
!ii# interna$ rate o return( and !, marks#
!iii# return on capita$ emp$oyed !accounting rate o return# based on average
investment. !, marks#
!b# Discuss brie$y your indings in eac section o !a# above and advise <eter te
investment proposa$ is inancia$$y acceptab$e. !% marks#
!1B marks#
!ACCA /9 /inancia$ ;anagement Pi$ot Paper 201% Q%#
Question 2 – 3#4* IRR* replacement ccles and pro$ect ad$usted discount rate
3e o$$o<ing drat appraisa$ o a proposed investment pro7ect as been prepared or te
inance director o K; Co by a trainee accountant. 3e pro7ect is consistent <it te
current business operations o K; Co.
5ear 1 2 % ) -
-a$es !unitsyr# 2B0(000 %00(000 B00(000 2B0(000
= = = = =
Contribution 1(,,0 2(12+ 2(GG0 1(,,0
/i4ed costs !B,0# !BG2# !B9G# !G,1#
Depreciation !%,+# !%,+# !%,*# !%,*#)nterest payments !200# !200# !200# !200#
3a4ab$e proit 1G2 92+ 1(%2* G2
3a4ation !%9# !2*+# !%2+# !19#
Proit ater ta4 1G2 +*9 1(1%9 !,GG# !19#
-crap va$ue 2B0
Ater6ta4 cas $o<s 1G2 +*9 1(1%9 !11G# !19#
Discount at 10 0.909 0.+2G 0.*B1 0.G+, 0.G21
Present va$ues 1%* *2G +G, !*9# !12#
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et present va$ue L 1(G%B(000 2(000(000 L !@,BB(000# so re7ect te pro7ect.
3e o$$o<ing inormation <as inc$uded <it te drat investment appraisa$F
1. 3e initia$ investment is @2 mi$$ion
2. -e$$ing priceF @12unit !current price terms#( se$$ing price in$ation is B per year
,. 'ariab$e costF @*unit !current price terms#( variab$e cost in$ation is % per year
%. /i4ed overead costsF @B00(000year !current price terms#( i4ed cost in$ation is G
per year
B. @200(000year o te i4ed costs are deve$opment costs tat ave a$ready been incurred
and are being recovered by an annua$ carge to te pro7ect
G. )nvestment inancing is by a @2 mi$$ion $oan at a i4ed interest rate o 10 per year
*. K; Co can c$aim 2B reducing ba$ance capita$ a$$o<ances on tis investment and
pays ta4ation one year in arrears at a rate o ,0 per year
+. 3e scrap va$ue o macinery at te end o te our6year pro7ect is @2B0(000
9. 3e rea$ <eigted average cost o capita$ o K; Co is * per year
10. 3e genera$ rate o in$ation is e4pected to be %.* per year
Re0uired@
!a# )dentiy and comment on any errors in te investment appraisa$ prepared by te trainee
accountant. !B marks#
!b# Prepare a revised ca$cu$ation o te net present va$ue o te proposed investment
pro7ect and comment on te pro7ects acceptabi$ity. !12 marks#
!c# Discuss te prob$ems aced <en undertaking investment appraisa$ in te o$$o<ing
areas and comment on o< tese prob$ems can be overcomeF
!i# assets <it rep$acement cyc$es o dierent $engts
!ii# an investment pro7ect as severa$ interna$ rates o return!iii# te business risk o an investment pro7ect is signiicant$y dierent rom te
business risk o current operations. !+ marks#
!2B marks#
!ACCA /9 /inancia$ ;anagement June 2010 Q,#
Question % – 3#4 (ith inflation* (or,in! capital chan!es and discussion (ith ris,
incorporation
?"3 Co as deve$oped a ne< conectionery $ine tat can be so$d or @B00 per bo4 and tat is
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e4pected to ave continuing popu$arity or many years. 3e /inance Director as proposed
tat investment in te ne< product sou$d be eva$uated over a our6year time6oriIon( even
toug sa$es <ou$d continue ater te ourt year( on te grounds tat cas $o<s ater our
years are too uncertain to be inc$uded in te eva$uation. 3e variab$e and i4ed costs !bot incurrent price terms# <i$$ depend on sa$es vo$ume( as o$$o<s.
-a$es vo$ume !bo4es# $ess tan 1 mi$$ion 1 1.9 mi$$ion 2 2.9 mi$$ion , ,.9 mi$$ion
'ariab$e costs !@ per bo4# 2.+ ,.00 ,.00 ,.0B
3ota$ i4ed costs !@# 1 mi$$ion 1.+ mi$$ion 2.+ mi$$ion ,.+ mi$$ion
/orecast sa$es vo$umes are as o$$o<s.
Hear 1 2 , %
Demand !bo4es# 0.* mi$$ion 1.G mi$$ion 2.1 mi$$ion ,.0 mi$$ion
3e production euipment or te ne< conectionery $ine <ou$d cost @2 mi$$ion and an
additiona$ initia$ investment o @*B0(000 <ou$d be needed or <orking capita$. Capita$
a$$o<ances !ta46a$$o<ab$e depreciation# on a 2B reducing ba$ance basis cou$d be c$aimed on
te cost o euipment. Proit ta4 o ,0 per year <i$$ be payab$e one year in arrears. A
ba$ancing a$$o<ance <ou$d be c$aimed in te ourt year o operation.
3e average genera$ $eve$ o in$ation is e4pected to be , per year and se$$ing price( variab$e
costs( i4ed costs and <orking capita$ <ou$d a$$ e4perience in$ation o tis $eve$. ?"3 Co
uses a nomina$ ater6ta4 cost o capita$ o 12 to appraise ne< investment pro7ects.
Re0uired@
!a# Assuming tat production on$y $asts or our years( ca$cu$ate te net present va$ue o
investing in te ne< product using a nomina$ terms approac and advise on its inancia$acceptabi$ity !<ork to te nearest @1(000#. !1, marks#
!b# Comment brie$y on te proposa$ to use a our6year time oriIon( and ca$cu$ate and
discuss a va$ue tat cou$d be p$aced on ater6ta4 cas $o<s arising ater te ourt year
o operation( using a perpetuity approac. Assume( or tis part o te uestion on$y(
tat beore6ta4 cas $o<s and proit ta4 are constant rom year ive on<ards( and tat
capita$ a$$o<ances and <orking capita$ can be ignored. !B marks#
!c# Discuss 3:"EE <ays o incorporating risk into te investment appraisa$ process.
!* marks#
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!2B marks#
!ACCA /9 /inancia$ ;anagement June 2011 Q1#
Question ) – 3#4 (ith nominal and real approach* (or,in! capital chan!es
:D5 Co is a $isted company <ic p$ans to meet increased demand or its products by
buying ne< macinery costing @B mi$$ion. 3e macinery <ou$d $ast or our years( at te
end o <ic it <ou$d be rep$aced. 3e scrap va$ue o te macinery is e4pected to be B
o te initia$ cost. Capita$ a$$o<ances <ou$d be avai$ab$e on te cost o te macinery on a
2B reducing ba$ance basis( <it a ba$ancing a$$o<ance or carge c$aimed in te ina$ year
o operation.
3is investment <i$$ increase production capacity by 9(000 units per year and a$$ o tese
units are e4pected to be so$d as tey are produced. "e$evant inancia$ inormation in current
price terms is as o$$o<sF
?orecast inflation
-e$$ing price @GB0 per unit %.0 per year
'ariab$e cost @2B0 per unit B.B per year
)ncrementa$ i4ed costs @2B0(000 per year B.0 per year
)n addition to te initia$ cost o te ne< macinery( initia$ investment in <orking capita$ o
@B00(000 <i$$ be reuired. )nvestment in <orking capita$ <i$$ be sub7ect to te genera$ rate
o in$ation( <ic is e4pected to be %* per year.
:D5 Co pays ta4 on proits at te rate o 20 per year( one year in arrears. 3e company
as a nomina$ !money terms# ater6ta4 cost o capita$ o 12 per year.
Re0uired@
!a# Ca$cu$ate te net present va$ue o te p$anned purcase o te ne< macinery using a
nomina$ !money terms# approac and comment on its inancia$ acceptabi$ity.
!1% marks#
!b# Discuss te dierence bet<een a nomina$ !money terms# approac and a rea$ terms
approac to ca$cu$ating net present va$ue. !B marks#
!c# )dentiy 35 inancia$ ob7ectives o a $isted company suc as :D5 Co and discuss
o< eac o tese inancia$ ob7ectives is supported by te p$anned investment in ne<
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macinery. !G marks#
!2B marks#
!ACCA /9 /inancia$ ;anagement June 201, Q1#
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"hapter #ro$ect Appraisal and Ris,
I. ensitivit analsis
1. 3e o$$o<ing inancia$ inormation re$ates to an investment pro7ectF
@000
Present va$ue o sa$es revenue B0(02B
Present va$ue o variab$e costs 2B(%*B
Present va$ue o contribution 2%(BB0
Present va$ue o i4ed costs 1+(2B0
Present va$ue o operating income G(,00
)nitia$ investment B(000
et present va$ue 1(,00
+hat is the sensitivit of the net present value of the investment pro$ect to a
chan!e in sales volume6
A *1
? 2G
C B1
D B,
!ACCA /9 /inancia$ ;anagement Pi$ot Paper 201%#
2. Arno$d is contemp$ating purcasing or @2+0(000 a macine <ic e <i$$ use to
produce B0(000 units o a product per annum or ive years. 3ese products <i$$ be so$d
or @10 eac and unit variab$e costs are e4pected to be @G. )ncrementa$ i4ed costs <i$$
be @*0(000 per annum or production costs and @2B(000 per annum or se$$ing and
administration costs. Arno$d as a reuired return o 10 per annum.
?y o< many units must te estimate o production and sa$es vo$ume a$$ or te pro7ect
to be regarded as not <ort<i$e>
A 2(+*B
? *(*+B
C +(11B
D 12(,1B
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,. A pro7ect as te o$$o<ing cas $o<s.
30 ut$o< @110(000
316% )n$o< @%0(000
At te companys cost o capita$ o 10 te P' o te pro7ect is @1G(+00.
App$ying sensitivity ana$ysis to te cost o capita$( <at percentage cange in te cost
o capita$ <ou$d cause te pro7ect P' to a$$ to Iero.>
A *0
? 1*
C B
D %1
II. Expected value
%. A risk averse investor is considering our mutua$$y e4c$usive investments( <ic ave
te o$$o<ing caracteristicsF
#ro$ect Expected return tandard deviation of
expected returns
A$pa 1B B
?eta 1% +
=amma 2B 10
De$ta 12 B
5ic t<o o te above investments <i$$ te investor immediate$y REBE"T>
A A$pa and ?eta
? A$pa and =amma
C =amma and De$ta
D ?eta and De$ta
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B. 5en using te e4pected va$ue criterion( it is assumed tat te individua$ <ants to
A ;inimise risk or a given $eve$ o return
? ;a4imise return or a given $eve$ o risk
C ;inimise risk irrespective o te $eve$ o return
D ;a4imise return irrespective o te $eve$ o risk
G. 3e $o<er risk o a pro7ect can be recogniIed by increasing
A 3e cost o te initia$ investment o te pro7ect
? 3e estimates o uture cas in$o<s rom te pro7ect
C 3e interna$ rate o return o te pro7ect
D 3e reuired rate o return o te pro7ect
*. 5ic o te o$$o<ing are true in respect o using e4pected va$ues in net present va$ue
ca$cu$ations>
1 Appropriate or one6o events
2 :ides risk
, Probab$y <ont actua$$y occur
% E$iminates uncertainty
A 1( 2 and , on$y
? , and % on$y
C 2 and , on$y
D 1( 2 and %
+. -a$es vo$umes are e4pected to be eiter 20(000 units <it G0 probabi$ity or tey are
e4pected to be 2B(000 units. Price <i$$ eiter be @10 !0., probabi$ity# or e$se @1B.;argins are e4pected to be ,0 or %0 o sa$es <it an even cance o eac.
5at is te e4pected tota$ cost>
A @10,(9B0
? @19,(0B0
C @29*(000
D @10B(000
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III. imulation
9. 5en considering investment appraisa$ under uncertainty( a simu$ation e4ercise
A Considers te eect o canging one variab$e at a time
? Considers te impact o many variab$es canging at te same time
C Points direct$y to te correct investment decision
D Assesses te $ike$iood o a variab$e canging
10. 5at is te main advantage o using simu$ations to assist in investment appraisa$>
A A c$ear decision ru$e
? ;ore tan one variab$e can cange at a time
C -tatistica$$y more accurate tan oter metods
D ?eing diagrammatic it is easier to understand
Question - – Ris,* uncertaint* paac,* sensitivit analsis and E3#4
Mmunat p$c is considering investing @B0(000 in a ne< macine <it an e4pected $ie o ive
years. 3e macine <i$$ ave no scrap va$ue at te end o ive years. )t is e4pected tat
20(000 units <i$$ be so$d eac year at a se$$ing price o @,00 per unit. 'ariab$e production
costs are e4pected to be @1GB per unit( <i$e incrementa$ i4ed costs( main$y te <ages o a
maintenance engineer( are e4pected to be @10(000 per year. Mmunat p$c uses a discount rate
o 12 or investment appraisa$ purposes and e4pects investment pro7ects to recover teir
initia$ investment <itin t<o years.
Re0uired@
!a# E4p$ain <y risk and uncertainty sou$d be considered in te investment appraisa$
process. !B marks#!b# Ca$cu$ate and comment on te payback period o te pro7ect. !% marks#
!c# Eva$uate te sensitivity o te pro7ects net present va$ue to a cange in te o$$o<ing
pro7ect variab$esF
!i# sa$es vo$ume
!ii# sa$es price
!iii# variab$e cost
and discuss te use o sensitivity ana$ysis as a <ay o eva$uating pro7ect risk.
!10 marks#
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!d# Mpon urter investigation it is ound tat tere is a signiicant cance tat te
e4pected sa$es vo$ume o 20(000 units per year <i$$ not be acieved. 3e sa$es
manager o Mmunat p$c suggests tat sa$es vo$umes cou$d depend on e4pectedeconomic states tat cou$d be assigned te o$$o<ing probabi$itiesF
Economic state Poor orma$ =ood
Probabi$ity 0., 0.G 0.1
Annua$ sa$es vo$ume !units# 1*(B00 20(000 22(B00
Ca$cu$ate and comment on te e4pected net present va$ue o te pro7ect. !G marks#
!2B marks#
!ACCA 2.% /inancia$ ;anagement and Contro$ December 200% QB#
Question – E3#4
Carcross Co engages in o6sore dri$$ing operations or oi$ deposits. 3e company as
recent$y spent @B mi$$ion in surveying a region in te =u$ o ;e4ico and as ound te
e4istence o signiicant oi$ deposits tere. 3e sea bed in te region( o<ever( as a rock
ormation tat may make access to te oi$ deposits diicu$t. 3e tota$ oi$ deposits in te
region ave been estimated at ,0 mi$$ion barre$s but te amount e4tracted <i$$ vary
according to te conditions aced <en dri$$ing operations commence. 3e companys
senior geo$ogist be$ieves tat tree possib$e outcomes are $ike$y rom dri$$ing operations and
as made te o$$o<ing estimates concerning te percentage o tota$ oi$ deposits tat <i$$ be
e4tracted under eac outcomeF
>utcome #ercenta!e of total oil
deposits extracted
#roailit
1 100 0.1
2 %0 0.B, 2B 0.%
) te company decides to go aead <it te dri$$ing operation( an immediate payment o
@%0 mi$$ion or dri$$ing rigts( a$ong <it annua$ payments o @B or eac barre$ o oi$
e4tracted must be made to te ;e4ican government. Euipment costing @12B mi$$ion must
be acuired immediate$y but dri$$ing <i$$ not commence unti$ te second year o te our6
year $icence period. )t is e4pected tat( <icever o te above outcomes arise( te oi$ <i$$
be e4tracted even$y over te dri$$ing period. Annua$ operating costs !e4c$uding any
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payments to te ;e4ican government# <i$$ be @120 mi$$ion in te irst year and @1G0
mi$$ion or eac o te remaining tree years o te $icence. At te end o te $icence period(
te euipment <i$$ be so$d at a price tat is eua$ to its origina$ cost $ess @+ or eac barre$
o oi$ tat as been e4tracted.
i$ prices over te period o te dri$$ing $icence are estimated to be as o$$o<sF
5ear #rice per arrel
1 @*0
2 @+B
, @*B
% @100
3e company as a cost o capita$ o 1%.
5orkings sou$d be in @mi$$ions and to one decima$ p$ace.
Re0uired@
!a# Ca$cu$ate te e4pected net present va$ue !EP'# o te investment proposa$.
!10 marks#
!b# Ca$cu$ate te net present va$ue o te <orst possib$e outcome. !B marks#
!c# Comment on te resu$ts o your ca$cu$ations in !a# and !b# above. !2 marks#
!d# Discuss te <eaknesses o te EP' approac or decision6making purposes.
!, marks#
!20 marks#
B0
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"hapter 7 Asset Investment &ecisions and "apital Rationin!
I. Lease or /u
1. Consider te o$$o<ing t<o statements concerning inance $easing.
1. 3e $essor is responsib$e or te maintenance and servicing o te asset
2. 3e period o te $ease <i$$ cover a$$( or substantia$$y a$$( o te useu$ economic
$ie o te $eased asset.
5ic one o te o$$o<ing combinations !truea$se# concerning te above statements
is correct>
tatement 1 tatement 2
A 3rue 3rue
? 3rue /a$se
C /a$se 3rue
D /a$se /a$se
2. 5ic o te o$$o<ing re$ate to inance $eases as opposed to operating $eases>
1 ;aintained and insured by te $essor
2 Asset appears on statement o inancia$ position o $essee
, Euipment $eased or a sorter period tan its e4pected useu$ $ie
A 2 on$y
? 1 and 2 on$y
C 2 and , on$y
D 1 and , on$y
,. A? Co is considering eiter $easing an asset or borro<ing to buy it( and is attempting to
ana$yse te options by ca$cu$ating te net present va$ue o eac. 5en comparing te
t<o( A? Co is uncertain <eter tey sou$d inc$ude interest payments in teir option
to Nborro< and buy as it is a uture( incrementa$ cas $o< associated <it tat option.
3ey are a$so uncertain <ic discount rate to use in te net present va$ue ca$cu$ation
or te $ease option.
:o< sou$d A? Co treat te interest payments and <at discount rate sou$d tey use>
B1
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Include interest6 &iscount rate
A Hes Ater ta4 cost o te $oan i tey borro< and buy
? Hes A? Cos 5ACC
C o Ater ta4 cost o te $oan i tey borro< and buy
D o A? Cos 5ACC
Question 7 – #urchase or Lease the 3e( Machine
A=D Co is a proitab$e company <ic is considering te purcase o a macine costing
O,20(000. ) purcased( A=D Co <ou$d incur annua$ maintenance costs o O2B(000. 3e
macine <ou$d be used or tree years and at te end o tis period <ou$d be so$d or
OB0(000. A$ternative$y( te macine cou$d be obtained under an operating $ease or an annua$
$ease renta$ o O120(000 per year( payab$e in advance.
A=D Co can c$aim capita$ a$$o<ances on a 2B reducing ba$ance basis. 3e company pays
ta4 on proits at an annua$ rate o ,0 and a$$ ta4 $iabi$ities are paid one year in arrears.
A=D Co as an accounting year tat ends on ,1 December. ) te macine is purcased(
payment <i$$ be made in January o te irst year o operation. ) $eased( annua$ $ease renta$s
<i$$ be paid in January o eac year o operation.
Re0uired@
!a# Msing an ater6ta4 borro<ing rate o *( eva$uate <eter A=D Co sou$d purcase or
$ease te ne< macine. !12 marks#
!b# E4p$ain and discuss te key dierences bet<een an operating $ease and a inance $ease.
!+ marks#
!Amended ACCA Paper 2.% /inancia$ ;anagement and Contro$ December 200B Q%#
B2
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Question C – #urchase or Lease the 3e( Machine
-pot Co is considering o< to inance te acuisition o a macine costing @*B0(000 <it
an operating $ie o ive years. 3ere are t<o inancing options.
>ption 1
3e macine cou$d be $eased or an annua$ $ease payment o @1BB(000 per year( payab$e at
te start o eac year.
>ption 2
3e macine cou$d be bougt or @*B0(000 using a bank $oan carging interest at an annua$
rate o * per year. At te end o ive years( te macine <ou$d ave a scrap va$ue o 10
o te purcase price. ) te macine is bougt( maintenance costs o @20(000 per year
<ou$d be incurred.
3a4ation must be ignored.
Re0uired@
!a# Eva$uate <eter -pot Co sou$d use $easing or borro<ing as a source o inance(
e4p$aining te eva$uation metod <ic you use. !10 marks#
!b# Discuss te attractions o $easing as a source o bot sort6term and $ong6term inance.
!B marks#
!Adapted ACCA /9 /inancia$ ;anagement December 201, Q%!a#& !b#
B,
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II. Asset Replacement &ecision
%. A company buys a macine or @10(000 and se$$s it or @2(000 at year ,. "unning costs
o te macine areF year 1 L @,(000 year 2 L @B(000 year , L @*(000.
) a series o macines are brougt( run and so$d on an ininite cyc$e o rep$acements(
<at is te euiva$ent annua$ cost o te macine i te discount rate is 10>
A @22(11%
? @+(2++
C @2%G
D @*(,*1
B. PD Co is deciding <eter to rep$ace its de$ivery vans every year or every oter year.
3e initia$ cost o a van is @20(000. ;aintenance costs <ou$d be ni$ in te irst year( and
@B(000 at te end o te second year. -econd6and va$ue <ou$d a$$ rom @10(000 to
@+(000 i it e$d on to te van or t<o years instead o 7ust one. PD Cos cost o capita$
is 10.
:o< oten sou$d PD Co rep$ace teir vans( and <at is te annua$ euiva$ent cost
!NEAC# o tat option>
Replace ever EA" ;=<
A 1 10(910
? 1 12(002
C 2 10(09,
D 2 +(*G1
G. A proessiona$ kitcen is attempting to coose bet<een gas and e$ectricity or its maineat source. nce a coice is made( te kitcen intends to keep to tat source
indeinite$y. Eac gas oven as a net present va$ue !P'# o @B0(000 over its useu$ $ie
o B years. Eac e$ectric oven as an P' o @G+(000 over its useu$ $ie o * years. 3e
cost o capita$ is +.
5ic sou$d te kitcen coose and <y>
A =as because its average P' per year is iger tan e$ectric
? E$ectric because its P' is iger tan gas
B%
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C E$ectric because its euiva$ent annua$ beneit is iger
D E$ectric because it $asts $onger tan gas
Question D – #urchase of 3e( Machine and IRR Duo Co needs to increase production capacity to meet increasing demand or an e4isting
product( NQuago( <ic is used in ood processing. A ne< macine( <it a useu$ $ie o
our years and a ma4imum output o G00(000 kg o Quago per year( cou$d be bougt or
@+00(000( payab$e immediate$y. 3e scrap va$ue o te macine ater our years <ou$d be
@,0(000. /orecast demand and production o Quago over te ne4t our years is as o$$o<sF
Hear 1 2 , %
Demand !units# 1.% mi$$ion 1.B mi$$ion 1.G mi$$ion 1.* mi$$ion
E4isting production capacity or Quago is $imited to one mi$$ion ki$ograms per year and te
ne< macine <ou$d on$y be used or demand additiona$ to tis.
3e current se$$ing price o Quago is @+.00 per ki$ogram and te variab$e cost o materia$s
is @B.00 per ki$ogram. ter variab$e costs o production are @1.90 per ki$ogram. /i4ed
costs o production associated <it te ne< macine <ou$d be @2%0(000 in te irst year o
production( increasing by @20(000 per year in eac subseuent year o operation.
Duo Co pays ta4 one year in arrears at an annua$ rate o ,0 and can c$aim capita$
a$$o<ances !ta46a$$o<ab$e depreciation# on a 2B reducing ba$ance basis. A ba$ancing
a$$o<ance is c$aimed in te ina$ year o operation.
Duo Co uses its ater6ta4 <eigted average cost o capita$ <en appraising investment
pro7ects. )t as a cost o euity o 11 and a beore6ta4 cost o debt o +G. 3e $ong6term
inance o te company( on a market6va$ue basis( consists o +0 euity and 20 debt.
Re0uired@
!a# Ca$cu$ate te net present va$ue o buying te ne< macine and advise on te
acceptabi$ity o te proposed purcase !<ork to te nearest @1(000#. !1, marks#
!b# Ca$cu$ate te interna$ rate o return o buying te ne< macine and advise on te
acceptabi$ity o te proposed purcase !<ork to te nearest @1(000#.
!% marks#
!c# E4p$ain te dierence bet<een risk and uncertainty in te conte4t o investment
BB
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appraisa$( and describe o< sensitivity ana$ysis and probabi$ity ana$ysis can be used to
incorporate risk into te investment appraisa$ process. !+ marks#
!3ota$ 2B marks#
!ACCA /9 /inancia$ ;anagement December 200* Q2#
Question 1 – 3#4* E0uivalent Annual "ost* ensitivit and #rofitailit Analsis
"idag Co is eva$uating t<o investment pro7ects( as o$$o<s.
#ro$ect 1
3is is an investment in ne< macinery to produce a recent$y6deve$oped product. 3e cost
o te macinery( <ic is payab$e immediate$y( is @1B mi$$ion( and te scrap va$ue o te
macinery at te end o our years is e4pected to be @100(000. Capita$ a$$o<ances !ta46
a$$o<ab$e depreciation# can be c$aimed on tis investment on a 2B reducing ba$ance basis.
)normation on uture returns rom te investment as been orecast to be as o$$o<sF
5ear 1 2 % )
-a$es vo$ume !unitsyear# B0(000 9B(000 1%0(000 *B(000
-e$$ing price !@unit# 2B.00 2%.00 2,.00 2,.00
'ariab$e cost !@unit# 10.00 11.00 12.00 12.B0
/i4ed costs !@year# 10B(000 11B(000 12B(000 12B(000
3is inormation must be ad7usted to a$$o< or se$$ing price in$ation o % per year and
variab$e cost in$ation o 2B per year. /i4ed costs( <ic are <o$$y attributab$e to te
pro7ect( ave a$ready been ad7usted or in$ation. "idag Co pays proit ta4 o ,0 per year
one year in arrears.
#ro$ect 2
"idag Co p$ans to rep$ace an e4isting macine and must coose bet<een t<o macines.
;acine 1 as an initia$ cost o @200(000 and <i$$ ave a scrap va$ue o @2B(000 ater our years. ;acine 2 as an initia$ cost o @22B(000 and <i$$ ave a scrap va$ue o @B0(000 ater
tree years. Annua$ maintenance costs o te t<o macines are as o$$o<sF
5ear 1 2 % )
;acine 1 !@year# 2B(000 29(000 ,2(000 ,B(000
;acine 2 !@year# 1B(000 20(000 2B(000
5ere re$evant( a$$ inormation re$ating to Pro7ect 2 as a$ready been ad7usted to inc$ude
BG
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e4pected uture in$ation. 3a4ation and capita$ a$$o<ances must be ignored in re$ation to
;acine 1 and ;acine 2.
>ther information"idag Co as a nomina$ beore6ta4 <eigted average cost o capita$ o 12 and a nomina$
ater6ta4 <eigted average cost o capita$ o *.
Re0uired@
!a# Ca$cu$ate te net present va$ue o Pro7ect 1 and comment on <eter tis pro7ect is
inancia$$y acceptab$e to "idag Co. !12 marks#
!b# Ca$cu$ate te euiva$ent annua$ costs o ;acine 1 and ;acine 2( and discuss <ic
macine sou$d be purcased. !G marks#
!c# Critica$$y discuss te use o sensitivity ana$ysis and probabi$ity ana$ysis as <ays o
inc$uding risk in te investment appraisa$ process( reerring in your ans<er to te
re$ative eectiveness o eac metod. !* marks#
!2B marks#
!ACCA /9 /inancia$ ;anagement June 2012 Q1#
III. "apital Rationin!
*. 3e proitabi$ity inde4 may be used in investment decisions <ere capita$ rationing
e4ists. )n tis conte4t( <en se$ecting investments or an optima$ porto$io( te use o
te proitabi$ity inde4 is appropriate on$y <ereF
1. pro7ects are divisib$e.
2. capita$ rationing occurs <itin a sing$e investment period.
5ic one o te o$$o<ing combinations !truea$se# re$ating to te above statements is
correct>
tatement 1 tatement 2
A 3rue 3rue
? 3rue /a$se
C /a$se 3rue
D /a$se /a$se
B*
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+. =$arus Co is considering our separate investment opportunities but on$y as $imited
unds to invest during te current year. 3is means tat te company <i$$ not be ab$e to
invest u$$y in a$$ our opportunities. Eac investment opportunity is divisib$e !i.e. it is
possib$e to undertake part o an investment and to receive a pro rata return#. Detai$s o
eac investment opportunity are as o$$o<sF
Investment opportunit Initial outla #4 of net cash inflo(s
=m =m
Kurai 1+G 211
?arisan GB +%
Carnic 100 120
/$inders B0 *1
:o< sou$d te investment opportunities be ranked i =$arus Co <ises to ma4imise
te <ea$t o its sareo$ders>
#ro$ect ran,in!
1st 2nd %rd )th
A /$inders ?arisan Carnic Kurai
? Kurai Carnic ?arisan /$inders
C /$inders Carnic ?arisan Kurai
D Kurai /$inders Carnic ?arisan
9. 3era Co is considering an investment in one o t<o mutua$$y6e4c$usive pro7ects. 3e
company is committed to ma4imising te <ea$t o its sareo$ders. Detai$s o eac
pro7ect( <ic ave te same $eve$ o risk( are as o$$o<sF
&iscounted
paac,
#rofitailit
index
Internal rate
of return
3et present
valuePro7ect A$pa , years 1.B 1+ @+0(000
Pro7ect ?eta % years 1.G 19 @*B(000
5ic pro7ect sou$d be se$ected and or <at reason>
A Pro7ect A$pa because it as te sorter discounted payback period
? Pro7ect A$pa because it as te iger net present va$ue
C Pro7ect ?eta because it as te iger proitabi$ity inde4
D Pro7ect ?eta because it as te iger interna$ rate o return
B+
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10. 5ere tere is capita$ rationing( te proitabi$ity inde4 !P)# may be used to rank
investment pro7ects <it a positive net present va$ue. )t as been c$aimed tat using te
P) is appropriate on$y <enF
1. Capita$ rationing is or a sing$e period.
2. 3e investment pro7ects are indivisib$e.
5ic E o te o$$o<ing combinations !truea$se# concerning te above statements
is correct>
tatement 1 tatement 2
A 3rue 3rue
? 3rue /a$se
C /a$se 3rue
D /a$se /a$se
11. A company as @B00(000 avai$ab$e or investment and is considering te o$$o<ing our
divisib$e( but not repeatab$e( pro7ects to invest inF
Initial outla 3et present value #rofitailit index
Pro7ect ne @,00(000 @G0(000 1.20
Pro7ect 3<o @100(000 @%0(000 1.%0
Pro7ect 3ree @200(000 @B0(000 1.2B
Pro7ect /our @1B0(000 @%B(000 1.,0
5at is te ma4imum net present va$ue te company can generate rom its investment>
A @19B(000? @1%B(000
C @1,B(000
D @110(000
B9
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12. /u$mar p$c is current$y considering tree investment opportunities. Detai$s o eac
opportunity are given be$o<F
Investment opportunit
Alpha /eta 9amma
=m =m =m
)nitia$ out$ay +0 1%0 90
/uture net in$o<s
Hear 1 190 1+0 10
Hear 2 10 120 220
3e company as a capita$ budget tat is restricted in te year o te investment and it
<i$$ not be possib$e to undertake a$$ tree pro7ects in u$$. 3e investment opportunities
are independent o one anoter and eac pro7ect is divisib$e !tat is( it is possib$e to
undertake part o an investment and to receive a pro rata return#. 3e cost o capita$ o
te company is 12 per cent and te company uses te net present va$ue metod o
investment appraisa$.
5ic o te o$$o<ing is te correct ranking o te tree investment opportunities>
Ran,in!
1 2 %
A A$pa =amma ?eta
? ?eta =amma A$pa
C ?eta A$pa =amma
D =amma A$pa ?eta
1,. Purus p$c is considering our possib$e investment pro7ects or te current year but as
on$y a $imited amount to invest. As a resu$t it <i$$ not be ab$e to undertake in u$$ a$$ o te pro7ects avai$ab$e. A$$ o te pro7ects are divisib$e !i.e. it is possib$e to undertake
part o a pro7ect and to receive a pro rata return#. Detai$s o eac pro7ect are as o$$o<sF
#ro$ect Investment outla #resent value of net cash inflo(s
=m =m
Japura %0 %+
?ranco %B G%
3apa7os G0 GG
apo *0 92
G0
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)n <at order sou$d tey be ranked i te business <ises to ma4imise te <ea$t o its
sareo$ders>
#ro$ect ran,in!
1 2 % )
A Japura ?ranco 3apa7os apo
? 3apa7os ?ranco Japura apo
C ?ranco apo Japura 3apa7os
D apo 3apa7os ?ranco Japura
1%. Keb$e p$c is considering an investment pro7ect tat as an initia$ out$ay o$$o<ed by
constant annua$ net cas in$o<s trougout its ininite $ie. 3e present va$ue o te
pro7ect is @%0 mi$$ion and te interna$ rate o return on te pro7ect is 20. 3e pro7ect
as a proitabi$ity !present va$ue# inde4 o %0.
5at are te annua$ net cas in$o<s and initia$ out$ay o tis pro7ect>
Annual net cash inflo(s
;=m<
Initial outla
;=m<
A 1.G +.0
? 2.0 10.0
C B0.0 10.0
D ,2.0 1G0.0
1B. 3e directors o :ybris p$c are considering te o$$o<ing investment pro7ectsF
Initial outla Total present value
= =
Pro7ect 8eo %B0 BG0Pro7ect 3aurus 2+B ,*0
Pro7ect Pisces 2%0 ,,0
3e directors ave a $imited capita$ e4penditure budget and cannot invest in a$$
proitab$e pro7ects. A$$ pro7ects are divisib$e.
Assuming tat te company <ises to ma4imise te <ea$t o its sareo$ders( <at
sou$d be te order o priority or te tree pro7ects>
G1
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>rder of priorit
Leo Taurus #isces
A 1 , 2
? 1 2 ,
C , 2 1
D 2 , 1
1G. 5ic o te o$$o<ing are potentia$$y practica$ <ays o attempting to dea$ <it a
capita$ constraint>
1 8ease
2 Joint venture
, De$ay one or more o te pro7ects
A 1 and , on$y
? 2 and , on$y
C 1 and 2 on$y
D 1( 2 and ,
Question 11 – "apital rationin! and relevant cash flo(s
?asri$ p$c is revie<ing investment proposa$s tat ave been submitted by divisiona$
managers. 3e investment unds o te company are $imited to @+00(000 in te current year.
Detai$s o tree possib$e investments( none o <ic can be de$ayed( are given be$o<.
#ro$ect 1
An investment o @,00(000 in <ork station assessments. Eac assessment <ou$d be on an
individua$ emp$oyee basis and <ou$d $ead to savings in $abour costs rom increased
eiciency and rom reduced absenteeism due to <ork6re$ated i$$ness. -avings in $abour costs
rom tese assessments in money terms are e4pected to be as o$$o<sF
5ear 1 2 % ) -
Cas $o<s !@000# +B 90 9B 100 9B
#ro$ect 2
An investment o @%B0(000 in individua$ <orkstations or sta tat is e4pected to reduce
administration costs by @1%0(+00 per annum in money terms or te ne4t ive years.
G2
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#ro$ect %
An investment o @%00(000 in ne< ticket macines. et cas savings o @120(000 per
annum are e4pected in current price terms and tese are e4pected to increase by ,G per annum due to in$ation during te ive6year $ie o te macines.
?asri$ p$c as a money cost o capita$ o 12 and ta4ation sou$d be ignored.
Re0uired@
!a# Determine te best <ay or ?asri$ p$c to invest te avai$ab$e unds and ca$cu$ate te
resu$tant P'F
!i# on te assumption tat eac o te tree pro7ects is divisib$e
!ii# on te assumption tat none o te pro7ects are divisib$e. !10 marks#
!b# E4p$ain o< te P' investment appraisa$ metod is app$ied in situations <ere
capita$ is rationed. !, marks#
!c# Discuss te reasons <y capita$ rationing may arise. !* marks#
!d# Discuss te meaning o te term Nre$evant cas $o<s in te conte4t o investment
appraisa$( giving e4amp$es to i$$ustrate your discussion. !B marks#
!2B marks#
!ACCA 2.% /inancia$ ;anagement and Contro$ December 200, Q,#