FM Investment Apprasial Basics

Which TWO of the following statements are correct?

• Tax allowable depreciation is a relevant cash flow when evaluating borrowing to buy

  compared to leasing as a financing choice

• Asset replacement decisions require relevant cash flows to be discounted by the after-

  tax cost of debt

• If capital is rationed, divisible investment projects can be ranked by the profitability

  index when determining the optimum investment schedule

• Government restrictions on bank lending are associated with hard capital rationing

A company has 31 December as its accounting year-end. On I January 20X5, a new machine

costing is purchased. The company expects to sell the machine on 31 December

20X6 for

The rate of corporation tax for the company is 30% and tax is paid at the end of the year in

which it is incurred. Tax-allowable depreciation is obtained at 25% on the reducing balance

basis, and a balancing allowance is available on disposal of the asset. The company makes

sufficient profits to obtain relief for tax-allowable depreciation as soon as they arise.

If the company's cost of capital is 15% per year, what is the present value of the tax savings

from the tax-allowable depreciation at I January 20X5 (to the nearest thousand dollars)?

• $391,000

• $263,000

• $719,000

• $248,000

A company is considering a project that has an initial outflow followed by several years of

cash inflows, with a cash outflow in the final year.

How many internal rates of return could there be for this project?

• Either zero or two

• Either one or two

• Zero, one or two

• Only two

The lower risk Of a project can be recognised by increasing which Of the following?

• The cost Of the initial investment Of the project

• The estimates of future cash inflows from the project

• The internal rate of return of the project

• The required rate of return of the project

Sudan co wishes to undertake a project requiring an investment Of S732,cm which Will

generate equal annual inflows of $146,400 in

If the first inflow from the investment is a year after the initial investment, what is the IRR

of the project?

• 20%

• 25%

• 400%

• 500%

Which THREE of the following are advantages of the IRR?

• Considers the whole life Of the project

• Uses cash flows not profits

• It is a measure of absolute return

• It is an accurate calculation

• It considers the time value of money

Jones Ltd plans to spend on an item of capital equipment on I January 20X2. The

expenditure is eligible for 25% tax-allowable depreciation, and Jones pays corporation tax at

30%. Tax is paid at the end of the accounting period concerned. The equipment will produce

savings of $30,cm per year for its expected useful life deemed to be receivable every

31 December. The equipment will be sold for $25,000 on 31 December 20X5. Jones has a

31 December year-end and has a 10% post-tax cost Of capital.

What is the present value at I January 20X2 of the tax savings that result from the tax-

allowable depreciation?

• $13,170

• $15,828

• $16,018

• $19,827

Spotty Ltd plans to purchase a machine costing to save labour costs through

efficiency savings, Labour savings would be in the first year and would increase in the

second year by 10%. The estimated general annual rate of inflation is 8% and the company's

real cost of capital is estimated at 12%. The machine has a two-year life with an estimated

actual salvage value of E5,Ü receivable at the end of year 2, All cash flows occur at the year-

end.

What is the negative NPV (to the nearest $10) of the proposed investment?

• $50

• $270

• $380

• $650

A company buys a machine for $1000 and sells it for at time 3. Running costs Of the

machine are: time I = $3000 time 2 = $5000, time 3 =$7000

If a series Of machines are bought, run and sold on an infinite cycle Of replacements, What

is the equivalent annual cost Of the machine if the discount rate is 10%?

• $22,114

• $8,892

• $8,288

• $7,371

A project has an initial outflow at time O when an asset is bought, then a series of revenue

inflows at the end of each year, and then finally sales proceeds from the sale of the asset. Its

NPV is E12,mO when general inflation is zero % per year.

If general inflation were to rise to 7% per year, and all revenue inflows were subject to this

rate of inflation but the initial expenditure and resale value of the asset were not subject

to inflation, what would happen to the NPV?

• The NPV would remain the same

• The NPV would rise

• The NPV would fall

• The NPV could rise or fall