FM- ch. 2&3

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 $732A) which will

generate equal annual inflows of 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%

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

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,OOO 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

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

A company undertakes a project that involves purchasing machinery at a cost of

The machinery is used on the project for four years, generating operating cash inflows of

$20,000 per year. It is sold at the end of the project for Taxation is charged at a rate

of 30%.

Calculate the initial return on capital employed (ROCE) for the project, to the nearest whole

percentage.

• 10%

• 20%

• 30%

• 40%

An investment project has a cost of payable at the start of the first year of operation.

The possible future cash flows arising from the investment project have the following present

values and associated probabilities:

PV of PV of

Year 1 cash flow Probability Year 2 cash flow Probability

16,000 0.15 20,000 0.75

12,000 0.60 (2,000) 0.25

(4,000) 0.25

What is the expected value (EV) of the net present value of the investment project?

• $11,100

• $12,100

• $13,100

• $11,200

A company has a 'money' cost of capital of 21% per year. The general rate of inflation is

currently estimated at 8% per year.

What is the 'real' cost of capital (to the nearest whole number)?

• 10%

• 11%

• 12%

• 15%

A company has the following pattern of cash flow for a project:

Year Cash flow

$

0 (100,000)

1 40,000

2 20,000

3 30,000

4 5,000

5 40,000

The company uses a discount rate of 10%. In what year does discounted payback occur?

• year 2

• year 3

• year 4

• year 5