FM – Ch-  4, 5

FM – Ch- 4, 5

1st Grade

20 Qs

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FM – Ch-  4, 5

FM – Ch- 4, 5

Assessment

Quiz

Professional Development

1st Grade

Hard

Created by

PFC Education

Used 4+ times

FREE Resource

20 questions

Show all answers

1.

MULTIPLE CHOICE QUESTION

30 sec • 2 pts

DEF Co has a cost of capital of 12%.

Project A has a positive NPV of $5,000 when discounted at 12% and a positive NPV of $3,600 when discounted at 16%.

Project B has a positive NPV of $8,000 when discounted at 12% and a negative NPV of $1,000

when discounted at 16%.

The projects are mutually exclusive.

Required

Q. What is the internal rate of return for projects A and B?

Project A has an IRR of 26.3% and B an IRR of 16.5%.

Project A has an IRR of 26.3% and B an IRR of 15.6%.

Project A has an IRR of 11+.3% and B an IRR of 16.5%.

Project A has an IRR of 11+.3% and B an IRR of 15.6%.

2.

MULTIPLE CHOICE QUESTION

30 sec • 2 pts

DEF Co has a cost of capital of 12%.

Project A has a positive NPV of $5,000 when discounted at 12% and a positive NPV of $3,600 when discounted at 16%.

Project B has a positive NPV of $8,000 when discounted at 12% and a negative NPV of $1,000

when discounted at 16%.

The projects are mutually exclusive.

Required

Q. Which of the following statements is correct?

Both NPV and IRR indicate that Project A is the more financially viable project.

In order to maximise shareholder wealth Project A is the better project.

Neither Project A nor Project B should be accepted from a financial perspective.

Project B will increase shareholder wealth more than Project A at the current cost of capital.

3.

MULTIPLE CHOICE QUESTION

30 sec • 2 pts

Bistro Co is a brewing company trying to decide whether to buy a new bottling machine for $10m to save on rental costs which are currently $6.6m p.a.

Running costs for the new machine would be $1.2m p.a.

The bottling machine has no resale value and has an expected life of three years.

All cash flows are quoted in current prices (i.e. in real terms) and are expected to rise in line with the consumer price index (or CPI, a measure of inflation) at 5.26% p.a.

Bistro's real cost of capital is 14%, and its nominal cost of capital is 20%. Ignore tax.

Required

Q. Evaluate whether the new bottling machine should be purchased.

Yes – NPV = +3.54

Yes – NPV = +2.54

No

Yes

4.

MULTIPLE CHOICE QUESTION

30 sec • 2 pts

SW Co has a 31 December year end and pays corporation tax at a rate of 30%, 12 months after the end of the year to which the cash flows relate. It can claim tax-allowable depreciation at a rate of 25% reducing balance. It pays $1m for a machine on 31 December SW Co's cost of capital is 10%.

What is the present value on 31 December of the benefit of the first portion of tax-allowable depreciation?

$250,000

$227,250

  $68,175

$75,000

5.

MULTIPLE CHOICE QUESTION

30 sec • 2 pts

A company receives a perpetuity of $20,000 per year in arrears, and pays 30% corporation tax 12 months after the end of the year to which the cash flows relate. At a cost of capital of 10%, what is the after-tax present value of the perpetuity?

$140,000

$145,454

$144,000

$127,274

6.

MULTIPLE CHOICE QUESTION

30 sec • 2 pts

A project has the following projected cash inflows.

Year 1 - $100,000

Year 2 - $125,000

Year 3 - $105,000

Working capital is required to be in place at the start of each year equal to 10% of the cash inflow for that year. The cost of capital is 10%.

What is the present value of the working capital?

$Nil

-$30,036

-$2,735

$33,000

7.

MULTIPLE CHOICE QUESTION

30 sec • 2 pts

AW Co needs to have $100,000 working capital in place immediately for the start of a 2- year project. The amount will stay constant in real terms. Inflation is running at 10% per year, and AW Co's money cost of capital is 12%.

What is the present value of the cash flows relating to working capital?

-$21,260

-$20,300

-$108,730

-$4,090

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