FM INVESTMENT APPRAISAL

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 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 $732,000 which will

generate equal annual inflows of $146,400 in perpetuity,

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%

Jones Ltd plans to spend $90,cm on an item of capital equipment on 1 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 $30,000 per year for its expected useful life deemed to be receivable every

31 December. The equipment will sold for 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 1 January 20X2 of the tax savings that result from the tax-

allowable depreciation?

• $13,170

• $15,828

• $16,018

• $19,827

A company buys a machine for $10,000 and sells it for at time 3. Running costs Of the

machine are: time 1 = $3,000; time 2 = $5,000; time 3 = $7,000.

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 E12A)O 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

• The NPV could rise or fall

Which TWO Of the following statements about the investment appraisal methods Of return

on capital employed (ROCE) and payback are true?

• Both methods are affected by changes in the cost Of capital

• The ROCE does not take account of returns over the entire life of the project

• The payback method is based on the project's cash flows

• A requirement for an early payback can increase a company's liquidity

When considering standard deviation as a statistical measure, which Of the following

statements is true?

• Standard deviation is a measure of the variability of a distribution around its mean

• The tighter the distribution, the higher the standard deviation will be

• The wider the dispersion, the less risky the situation

• Standard deviation is the weighted average of all the possible outcomes

In relation to a long-term lease, which Of the following statements is NOT correct?

• All the risks and rewards Of ownership transfer to the lessee

• The asset and lease obligation will be recorded in the statement of financial position

• The lease period will cover almost all Of the leased asset's useful economic life

• The lessor will be responsible for repairs and maintenance of the leased asset