FM - Ch-3 to Ch-5

Which of the following actions is LEAST likely to increase shareholder wealth?

• The weighted average cost of capital is decreased by a recent financing decision

• The financial rewards of directors are linked to increasing earnings per share

• The board of directors decides to invest in a project with a positive net present value

• The annual report declares full compliance with the corporate governance code

What (to the nearest $000) is the NPV of the project?

• $895,000

• $795,000

• $(701 ,000)

• $(801 ,000)

What was the IRR of the last investment decision made by the company?

• 10.79%

• 11.15%

• 14.21%

• 16.15%

. Which of the following new additional pieces of information would affect the NPV of the project?

(i).  The two current works supervisors each earn $50,000 and each expects to spend half their time supervising work on the new product.

(ii). Of the $1,500,000 capital investment mentioned, $1,000,000 relates to equipment that will be depreciated at $200,000 a year over the four-year life of the project to its residual scrap value.

A.  

B.  

C.  

D.  

• (i) changes the NPV; (ii) changes the NPV

• (i) changes the NPV; (ii) no effect

• (i) no effect; (ii) changes the NPV

• (i) no effect; (ii) no effect

Which of the following reasons does NOT justify using NPV in preference to IRR?

• NPV can cope with interest rates changing from year to year

• NPV is more consistent with the concept of maximising shareholder wealth

• NPV is unambiguous since projects may have several IRRs but only one NPV

• NPV makes use of the time value of money

How large (to the nearest $000) would an additional annual cost of the project or additional annual income stream from the project have to be for the project to just break even?

• 282

• 251

• 221

• 253

In relation to the return on capital employed (ROCE) investment appraisal method, which of the following statements is correct?

• ROCE leads to better investment decisions since it uses accounting profit rather than estimated cash flows

• Investment projects with a ROCE greater than the weighted average cost of capital should be accepted

• Investment projects with a ROCE less than the current ROCE of an organisation should be rejected

• ROCE takes into account all years of operation of an investment project

SW Co has a barrel of chemicals in its warehouse that it purchased for a project a while ago at a cost of $1,000. It would cost $400 for a professional disposal company to collect the barrel and dispose of it safely. However, the chemicals could be used in a potential project which is currently being assessed.

What is the relevant cost of using the chemicals in a new project proposal?

• $1,000 cost

• $400 benefit

• $400 cost

• $Nil

A new project being considered by BLW Co would require 1,000 hours of skilled labour. The current workforce is already fully employed but more workers can be hired in at a cost of $20 per hour. The current workers are paid $15 per hour on a project that earns a contribution of $10 per hour.

What is the relevant cost of labour to be included in the project appraisal?

• $10,000

• $15,000

• $20,000

•   $25,000

LW Co has a half empty factory on which it pays $5,000 p.a. rent. If it takes on a new project, it will have to move to a new bigger factory costing $17,000 p.a. and it could rent the old factory out for $3,000 pa until the end of the current lease.

What is the rental cost to be included in the project appraisal?

• $14,000

• $17,000

• $9,000

• $19,000