42
Revision 2 – Investment Appraisal Topics List 1. Investment Appraisal Methods Exam Question Reference a. Payback period Computation & comment Advantages and disadvantages Discounted payback period Jun 09 Jun 11 Q2b Q1c  b. Accounting rate o retur n !A""# Computation & comment Pi$ot Jun 09 Dec 12 Q%b Q2b Q1b Advantages and disadvantages c. et prese nt va$ ue ! P'# Computation & comment Jun 09 Dec 10 Q2b Q1a(b Advantages and disadvantages d. )nte rna$ rate o r etur n !) ""# Computation & comment Dec 0* Jun 0+ Jun 09 Q2b Q%b Q2b Dec 11 Q1b Advantages and disadvantages Pi$ot Jun 10 Q%c Q,c 2. t a! es in "a pi tal Investment #r o$ ec ts Jun 09 Q2a %. &eterminat ion of rel evant and non'relevant cas h fl o(s ). Al lo(in ! for Tax* I nf lati on and +or,in! "a pi tal a. )n $ati on -peciic in$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

MCQ InvestAppraisal

Embed Size (px)

DESCRIPTION

Finance MCQ

Citation preview

Page 1: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 1/42

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

Page 2: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 2/42

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,

Page 3: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 3/42

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%

Page 4: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 4/42

"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

Page 5: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 5/42

%. 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

Page 6: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 6/42

*. 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*

Page 7: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 7/42

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+

Page 8: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 8/42

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

Page 9: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 9/42

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

Page 10: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 10/42

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

Page 11: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 11/42

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

Page 12: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 12/42

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

,,

Page 13: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 13/42

"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

,%

Page 14: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 14/42

,. 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

Page 15: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 15/42

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

Page 16: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 16/42

+. 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

,*

Page 17: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 17/42

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$ue o te <orking capita$>

,+

Page 18: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 18/42

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

,9

Page 19: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 19/42

)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#

%0

Page 20: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 20/42

 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

%1

Page 21: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 21/42

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#

%2

Page 22: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 22/42

!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<

%,

Page 23: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 23/42

macinery. !G marks#

!2B marks#

!ACCA /9 /inancia$ ;anagement June 201, Q1#

%%

Page 24: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 24/42

"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

%B

Page 25: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 25/42

,. 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

%G

Page 26: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 26/42

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

%*

Page 27: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 27/42

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#

%+

Page 28: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 28/42

!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

%9

Page 29: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 29/42

 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

Page 30: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 30/42

"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

Page 31: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 31/42

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

Page 32: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 32/42

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,

Page 33: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 33/42

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%

Page 34: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 34/42

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

Page 35: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 35/42

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

Page 36: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 36/42

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*

Page 37: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 37/42

+. =$arus Co is considering our separate investment opportunities but on$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+

Page 38: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 38/42

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

Page 39: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 39/42

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

Page 40: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 40/42

)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

Page 41: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 41/42

>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

Page 42: MCQ InvestAppraisal

7/21/2019 MCQ InvestAppraisal

http://slidepdf.com/reader/full/mcq-investappraisal 42/42

#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,#