Management Accounting test 1

The wealth maximization to the shareholders will be delivered by:

• Dividend payments

• Increase in market value of shares

• Both of the above

• None of the above

Which of the following is true:

• When a second hand asset is purchased than any expenditure incurred on it to put it into working condition is a capital expenditure

• Carriage cost paid on purchase of goods is classified as revenue expenditure.

• Cost of demolishing an old building to replace it with a new one is a capital expenditure.

• All are true

. A company is planning to purchase a machinery costing $500,000 having useful life of 5 years. Its cash flows for the next 5 years will be as follows.

Year Cash flows

1 (200,000)

2 300,000

3 300,000

4 500,000

5 100,000

Calculate the payback period.

• 3 years 2 months

• 4 years 2 months

• 3 years 9 months

• 2 years 8 months

Which of the following is least likely to be the problem associated with payback period?

• It does not consider time value of money

• It does not consider whole project life

• It neglects the cash flows after payback period

• It is difficult to calculate in practical situations

The accounting rate of return is better measured;

• Total annual accounting profit expressed as a percentage of estimated average investment

• Average annual accounting profits expressed as a percentage of Estimated average investment

• Average accounting annual profits expressed as a percentage of total funds invested.

• None

ABC co is planning to undertake a project with initial outlay of $ 600,000 and it will yield annual profits (after depreciation) of $40000 per year for next 5 years. The residuals value of projects asset will be $ 60000.calculateARR

• 1.48%

• 7.41%

• 12.12%

• 2.42%

Alen is recently employed by a multinational company and he is asked to appraise a project. He has the following two opinions about discounting, Which are correct;

1. Discounting is to use future value and convert it into present value

2. Discounting is to use present value and convert it to future value

3. Discounting tells us how much worth the given project has in today’s term

4. Discounting tells us how much worth the given project has in future.

• 1 and 2 above

• 1 and 3 above

• 2 and 4 above

• 1 and 4 above

Which of the following best describes annuity factor?

1. It is series of cash flows of equal amount after equal intervals for infinite period of time

2. It is series of cash flows of equal; amounts after equal intervals for a limited period of time

• 1 only

• 2 only

• Both

• None

. Bravado ltd has two possible projects but can only raise funds to finance one of them. Investment appraisal techniques produced the following results:

Project A Project B

Pay back period 3.5 years 3 years

NPV $ 4,50,000 $ 2,50,000

ARR 15% 16%

Which project to choose?

• Project A because it has lesser payback period and higher NPV

• Project B because it has lower NPV accompanied by lower pay back period

• Project B because it sounds more feasible

• None

Abc co. using investment appraisal techniques calculated IRR of its project to be 19.33% where as its WACC is 15%. Depending on the information provided suggest whether to undertake project or not?

• It must undertake project as its IRR is greater than WACC

• It must not undertake as its IRR is greater than WACC

• It must undertake as there is WACC is too high.

• It must not undertake as IRR is too high