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

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

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

Which of the following is a drawback of the payback period method of investment appraisal?

• It is cash flow based

• It considers the time value of money

• It doesn't measure the potential impact on shareholder wealth

• It is profit based

. A project has average estimated cash flows of $3,000 per gear with an initial investment of $9,000.

Depreciation is straight-line with no residual value and the project has a five-year life span. The company has a target return on capital employed (ROCE) of 15% and a target payback period of 2.5 years. ROCE is based on initial investment.

Under which investment appraisal method(s), using the company's targets, will the project be accepted?

1)    ROCE

2)    Payback basis

• 1 only

• 2 only

• Both 1 and 2

• Neither 1 nor 2