Question 1

Which statement is true?

Accepted Answer

A) The Internal Rate of Return method assumes that cash reinvested in the course of the life of the project earns at the same rate as the project. 
B) The Net Present Value method assumes that the reinvestment rate is at the cost of capital. 
C) Both the Internal Rate of Return and the Net Present Value methods assume that the reinvestment rate is at the cost of capital. 
D) Both A and B. 
A) The Internal Rate of Return method assumes that cash reinvested in the course of the life of the project earns at the same rate as the project. 
B) The Net Present Value method assumes that the reinvestment rate is at the cost of capital. 
C) Both the Internal Rate of Return and the Net Present Value methods assume that the reinvestment rate is at the cost of capital. 
D) Both A and B.

Question 2

What is the factor in Net Present Value analysis that normally involves the least degree of uncertainty?

Accepted Answer

A) the future cash flows. 
B) the cost of the initial investment. 
C) the life of the project. 
D) the discount rate. 
A) the future cash flows. 
B) the cost of the initial investment. 
C) the life of the project. 
D) the discount rate.

Question 3

Use the information below to answer the following questions.
Han Ltd supplies chilli paste to large supermarket chains. The company is currently considering scrapping the old processor and investing in a new processor. Information about the investment is as follows: $$\begin{array} { l r } 
\text { Initial investment in processor } & \$ 105,000 \
\text { Operating cash flows over next 5 years: } & \
\quad \text { Cash receipts } & \$ 80,000 \
\quad \text { Cash payments } & \$ 40,000 \
\text { Residual value of processor in 5 years } & \$ 5,000 \
\text { Required rate of return } & 8 \% \
\text { Depreciation per antum } & \$ 20,000
\end{array}$$
-When a new investment requires an increase in working capital (e.g., accounts receivable, inventory)the analysis should incorporate this by:

Accepted Answer

A) recording a cash outflow in Year 0 and a cash inflow at the end of the project. 
B) recording a cash inflow at the end of the project. 
C) evenly dividing the amount of working capital as a cash outflow for each year of the investment. 
D) doing nothing as there is a nil impact on cash flows. 
A) recording a cash outflow in Year 0 and a cash inflow at the end of the project. 
B) recording a cash inflow at the end of the project. 
C) evenly dividing the amount of working capital as a cash outflow for each year of the investment. 
D) doing nothing as there is a nil impact on cash flows.

Question 4

Use the information below to answer the following questions.
Y3 Ltd is expanding its production of binoculars. The plant is expected to cost $750,000, have a life of 5 years, and a nil residual value. It will be ready for operation on 31 December 2017. The following statement of comprehensive income figures for the new binoculars are forecast: $\begin{array}{llllll}&2018 & 2019 & 2020 & 2021 & 2022 \
&\$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m}\
\text { Sales } & 1.5 & 1.3 & 1.4 & 1.2 & 1.1 \
\text { Costs (including depreciation) } & 1.0 & 1.0 & 1.0 & 1.0 & 1.0 \
\hline \text { Profit before tax } & \underline{0.5} & 0.3 & 0.4 & 0.2 & 0.1
\end{array}$ Depreciation has been calculated on a straightline basis. You should assume that all cash flows occur at the end of the year in which they arise. The company's cost of capital is 10%. Ignore taxation.
-Refer to the table above. The net present value (rounded)is:

Accepted Answer

A) $984,000. 
B) $1,019,900. 
C) $883,000. 
D) $860,500. 
A) $984,000. 
B) $1,019,900. 
C) $883,000. 
D) $860,500.

Question 5

Using the Net Present Value method, the decision rule for projects when finance is not a restriction is:

Accepted Answer

A) take on all projects with a positive NPV. 
B) select the project with the largest cash inflows. 
C) select the project where the cash inflows are greatest in the early years of the project. 
D) select the project with cash flows equal to the initial investment. 
A) take on all projects with a positive NPV. 
B) select the project with the largest cash inflows. 
C) select the project where the cash inflows are greatest in the early years of the project. 
D) select the project with cash flows equal to the initial investment.

Question 6

The time value of money is an important concept in investment decisions as it takes into account that:

Accepted Answer

A) a dollar received today is more valuable than a dollar received tomorrow. 
B) a dollar received today is equal to a dollar received tomorrow. 
C) a dollar received tomorrow is more valuable than a dollar received today. 
D) it takes time to earn profits. 
A) a dollar received today is more valuable than a dollar received tomorrow. 
B) a dollar received today is equal to a dollar received tomorrow. 
C) a dollar received tomorrow is more valuable than a dollar received today. 
D) it takes time to earn profits.

Question 7

Which of these is not generally regarded as an advantage of the payback method?

Accepted Answer

A) It emphasises early cash flows which have greater certainty. 
B) It emphasises liquidity. 
C) It minimises having to forecast too far into the future. 
D) It avoids having to take into account the time value of money. 
A) It emphasises early cash flows which have greater certainty. 
B) It emphasises liquidity. 
C) It minimises having to forecast too far into the future. 
D) It avoids having to take into account the time value of money.

Question 8

TG Industries is considering investing in a fleet of six delivery vehicles. The annual running costs are expected to total $90,000 per vehicle, including the driver's salary. The vehicles are expected to operate for a total of five years. At present TG industries uses a commercial carrier for its deliveries. The commercial carrier is expected to charge a total of $680,000 for each of the next five years to make the deliveries. What is the estimated net annual cash cost saving on delivery vehicle running cost if TG industries invests in the fleet of six vehicles?

Accepted Answer

A) $90,000. 
B) $400,000. 
C) $310,000. 
D) $140,000. 
A) $90,000. 
B) $400,000. 
C) $310,000. 
D) $140,000.

Question 9

The Internal Rate of Return is the discount rate that makes the Net Present Value:

Accepted Answer

A) zero. 
B) negative. 
C) high. 
D) positive. 
A) zero. 
B) negative. 
C) high. 
D) positive.

Question 10

Use the information below to answer the following questions.
Han Ltd supplies chilli paste to large supermarket chains. The company is currently considering scrapping the old processor and investing in a new processor. Information about the investment is as follows: $$\begin{array} { l r } 
\text { Initial investment in processor } & \$ 105,000 \
\text { Operating cash flows over next 5 years: } & \
\quad \text { Cash receipts } & \$ 80,000 \
\quad \text { Cash payments } & \$ 40,000 \
\text { Residual value of processor in 5 years } & \$ 5,000 \
\text { Required rate of return } & 8 \% \
\text { Depreciation per antum } & \$ 20,000
\end{array}$$
-Refer to the table above. What is the annual net cash flow for years 1-4?

Accepted Answer

A) $10,000. 
B) $30,000. 
C) $40,000. 
D) $20,000. 
A) $10,000. 
B) $30,000. 
C) $40,000. 
D) $20,000.

Question 11

After appraisal of an investment opportunity, the Net Present Value was calculated as $3,000. This indicated that the project's return is:

Accepted Answer

A) the opportunity rate. 
B) equal to the market rate of return. 
C) greater than the company's rate of return. 
D) greater than the discount rate used in the analysis. 
A) the opportunity rate. 
B) equal to the market rate of return. 
C) greater than the company's rate of return. 
D) greater than the discount rate used in the analysis.

Question 12

Use the information below to answer the following questions.
Y3 Ltd is expanding its production of binoculars. The plant is expected to cost $750,000, have a life of 5 years, and a nil residual value. It will be ready for operation on 31 December 2017. The following statement of comprehensive income figures for the new binoculars are forecast: $\begin{array}{llllll}&2018 & 2019 & 2020 & 2021 & 2022 \
&\$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m}\
\text { Sales } & 1.5 & 1.3 & 1.4 & 1.2 & 1.1 \
\text { Costs (including depreciation) } & 1.0 & 1.0 & 1.0 & 1.0 & 1.0 \
\hline \text { Profit before tax } & \underline{0.5} & 0.3 & 0.4 & 0.2 & 0.1
\end{array}$ Depreciation has been calculated on a straightline basis. You should assume that all cash flows occur at the end of the year in which they arise. The company's cost of capital is 10%. Ignore taxation.
-Refer to the table above. The accounting rate of return is:

Accepted Answer

A) 40%. 
B) 80%. 
C) 50%. 
D) 30%. 
A) 40%. 
B) 80%. 
C) 50%. 
D) 30%.

Question 13

Use the information below to answer the following questions.
Y3 Ltd is expanding its production of binoculars. The plant is expected to cost $750,000, have a life of 5 years, and a nil residual value. It will be ready for operation on 31 December 2017. The following statement of comprehensive income figures for the new binoculars are forecast: $\begin{array}{llllll}&2018 & 2019 & 2020 & 2021 & 2022 \
&\$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m}\
\text { Sales } & 1.5 & 1.3 & 1.4 & 1.2 & 1.1 \
\text { Costs (including depreciation) } & 1.0 & 1.0 & 1.0 & 1.0 & 1.0 \
\hline \text { Profit before tax } & \underline{0.5} & 0.3 & 0.4 & 0.2 & 0.1
\end{array}$ Depreciation has been calculated on a straightline basis. You should assume that all cash flows occur at the end of the year in which they arise. The company's cost of capital is 10%. Ignore taxation.
-Refer to the table above. The annual depreciation charge for the project is:

Accepted Answer

A) $300,000. 
B) $250,000. 
C) $150,000. 
D) $200,000. 
A) $300,000. 
B) $250,000. 
C) $150,000. 
D) $200,000.

Question 14

Which of these factors influences the returns required by investors from an investment project?

Accepted Answer

A) Interest foregone. 
B) Inflation. 
C) Risk premium. 
D) All are influences. 
A) Interest foregone. 
B) Inflation. 
C) Risk premium. 
D) All are influences.

Question 15

Use the information below to answer the following questions.
Han Ltd supplies chilli paste to large supermarket chains. The company is currently considering scrapping the old processor and investing in a new processor. Information about the investment is as follows: $$\begin{array} { l r } 
\text { Initial investment in processor } & \$ 105,000 \
\text { Operating cash flows over next 5 years: } & \
\quad \text { Cash receipts } & \$ 80,000 \
\quad \text { Cash payments } & \$ 40,000 \
\text { Residual value of processor in 5 years } & \$ 5,000 \
\text { Required rate of return } & 8 \% \
\text { Depreciation per antum } & \$ 20,000
\end{array}$$
-Refer to the table above. What is the annual net cash flow in year 5?

Accepted Answer

A) $45,000. 
B) $50,000. 
C) $35,000. 
D) $30,000. 
A) $45,000. 
B) $50,000. 
C) $35,000. 
D) $30,000.

Question 16

Which of the following does the Net Present Value method of investment appraisal not address?

Accepted Answer

A) the whole of the relevant cash flows. 
B) qualitative factors. 
C) the timing of the cash flows. 
D) None of the above, i.e., all matters are addressed. 
A) the whole of the relevant cash flows. 
B) qualitative factors. 
C) the timing of the cash flows. 
D) None of the above, i.e., all matters are addressed.

Question 17

On what should the decision to invest in a project be based?

Accepted Answer

A) both financial and quantitative information. 
B) both non-financial and qualitative information. 
C) both financial and non-financial information. 
D) none of the above. 
A) both financial and quantitative information. 
B) both non-financial and qualitative information. 
C) both financial and non-financial information. 
D) none of the above.

Question 18

Bev is considering purchasing a new button holer for her business. She estimates the machine will cost $90,000 and will be paid for in cash. Her cash savings from the first 4 years of operation of the machine will be $20,000 in year 1, $30,000 in year 2, $35,000 in year 3 and $35,000 in year 4. The payback period for the machine is:

Accepted Answer

A) 4 years. 
B) 3.86 years. 
C) 3.14 years. 
D) 2.66 years. 
A) 4 years. 
B) 3.86 years. 
C) 3.14 years. 
D) 2.66 years.

Question 19

The decision rule for the accounting rate of return method of assessing investment projects is to accept all projects with:

Accepted Answer

A) a positive return. 
B) the highest return. 
C) the highest return subject to a minimum required return. 
D) none of the above. 
A) a positive return. 
B) the highest return. 
C) the highest return subject to a minimum required return. 
D) none of the above.

Question 20

Use the information below to answer the following questions.
Y3 Ltd is expanding its production of binoculars. The plant is expected to cost $750,000, have a life of 5 years, and a nil residual value. It will be ready for operation on 31 December 2017. The following statement of comprehensive income figures for the new binoculars are forecast: $\begin{array}{llllll}&2018 & 2019 & 2020 & 2021 & 2022 \
&\$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m}\
\text { Sales } & 1.5 & 1.3 & 1.4 & 1.2 & 1.1 \
\text { Costs (including depreciation) } & 1.0 & 1.0 & 1.0 & 1.0 & 1.0 \
\hline \text { Profit before tax } & \underline{0.5} & 0.3 & 0.4 & 0.2 & 0.1
\end{array}$ Depreciation has been calculated on a straightline basis. You should assume that all cash flows occur at the end of the year in which they arise. The company's cost of capital is 10%. Ignore taxation.
-Refer to the table above. The payback period is:

Accepted Answer

A) between years 2 and 3. 
B) between years 4 and 5. 
C) between years 3 and 4. 
D) between years 1 and 2. 
A) between years 2 and 3. 
B) between years 4 and 5. 
C) between years 3 and 4. 
D) between years 1 and 2.

Which statement is true?

What is the factor in Net Present Value analysis that normally involves the least degree of uncertainty?

Using the Net Present Value method, the decision rule for projects when finance is not a restriction is:

The time value of money is an important concept in investment decisions as it takes into account that:

Which of these is not generally regarded as an advantage of the payback method?

The Internal Rate of Return is the discount rate that makes the Net Present Value:

After appraisal of an investment opportunity, the Net Present Value was calculated as $3,000. This indicated that the project's return is:

Which of these factors influences the returns required by investors from an investment project?

Which of the following does the Net Present Value method of investment appraisal not address?

On what should the decision to invest in a project be based?

The decision rule for the accounting rate of return method of assessing investment projects is to accept all projects with:

Introduction to Accounting

Measuring and Reporting Financial Position

Measuring and Reporting Financial Performance

Introduction to Limited Companies

Regulatory Framework for Companies

Measuring and Reporting Cash Flows

Corporate Social Responsibility and Sustainability Accounting

Analysis and Interpretation of Financial Statements

Cost-Volume-Profit Analysis and Relevant Costing

Full Costing

Budgeting

The Management of Working Capital

Financing the Business

Filters

Exam 12: Capital Investment Decisions

Which statement is true?

What is the factor in Net Present Value analysis that normally involves the least degree of uncertainty?

Using the Net Present Value method, the decision rule for projects when finance is not a restriction is:

The time value of money is an important concept in investment decisions as it takes into account that:

Which of these is not generally regarded as an advantage of the payback method?

The Internal Rate of Return is the discount rate that makes the Net Present Value:

After appraisal of an investment opportunity, the Net Present Value was calculated as $3,000. This indicated that the project's return is:

Which of these factors influences the returns required by investors from an investment project?

Which of the following does the Net Present Value method of investment appraisal not address?

On what should the decision to invest in a project be based?

The decision rule for the accounting rate of return method of assessing investment projects is to accept all projects with:

Introduction to Accounting

Measuring and Reporting Financial Position

Measuring and Reporting Financial Performance

Introduction to Limited Companies

Regulatory Framework for Companies

Measuring and Reporting Cash Flows

Corporate Social Responsibility and Sustainability Accounting

Analysis and Interpretation of Financial Statements

Cost-Volume-Profit Analysis and Relevant Costing

Full Costing

Budgeting

The Management of Working Capital

Financing the Business

Filters