WorksheetsFM - Ch 3 & 4 - Investment Appraisal (New)
Total questions: 30
Worksheet time: 1hrs 5mins
The initial investment is 5,000. In the first year the firm paid back 1,000 in the second year 2,000 and the third year 3,000. Calculate the payback period -
2 years
3 years
3 years 4 months
2 years 8 months
Calculate the ARR.
Initial investment is £12m.
£17.2
£16.5
£17.5
£21.4
NW Co is considering investing $46,000 in a new delivery lorry that will last for 4 years, after which time it will be sold for $7,000. Depreciation is charged on a straight-line basis. Forecast operating profits/(losses) to be generated by the machine are as follows.
Year $
1 16,500
2 23,500
3 13,500
4 (1,500)
What is the return on capital employed (ROCE) for the lorry (using the average investment method, to the nearest %)?
49%
49.5%
48%
None of the above
NW Co is considering investing $46,000 in a new delivery lorry that will last for 4 years, after which time it will be sold for $7,000. Depreciation is charged on a straight-line basis. Forecast operating profits/(losses) to be generated by the machine are as follows.
Year $
1 16,500
2 23,500
3 13,500
4 (1,500)
Assuming operational cash flows arise evenly over the year, what is the payback period for this investment (to the nearest month)?
1 year 7 months
2 year 7 months
1 year 5 months
3 years 2 months
Which of the following are benefits of the ROCE method of investment appraisal?
It is cash flow based.
It will not be impacted by a company’s accounting polices
It is a percentage which, being meaningful to non-finance professionals, helps communicate the benefits of investment decisions
None of these
SW Co has a barrel of chemicals in its warehouse that it purchased for a project a while ago at a cost of $1,000. It would cost $400 for a professional disposal company to collect the barrel and dispose of it safely.
However, the chemicals could be used in a potential project which is currently being assessed. What is the relevant cost of using the chemicals in a new project proposal?
$1,000 cost
$400 benefit
$400 cost
Nil
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
$25,000
Which of the following is a drawback of the payback period method of investment appraisal?
It is cash flow based.
It considers the time value of money
It doesn't measure the potential impact on shareholder wealth.
It is profit based.
A company is evaluating an investment project with the following forecast cash flows:
Time 0 1 2 3 4
Cash flow ($m) (6.5) 2.4 3.1 2.1 1.8
Using discount rates of 15% and 20%, what is the internal rate of return of the investment project? (to one decimal place)
17.7%
17.8%
17.6%
None
EE Co is considering investing in a new 40-year project which will require an initial investment of $50,000 (with zero scrap value) and has a payback period of 20 years. The 40-year project has consistent cash flows each year.
What is the ROCE (using the average investment method, to one decimal place)?
6 %
5.5 %
5 %
None of the above
An accountant is paid $30,000 per annum and spends 2 weeks working on appraising project Alpha.
Why should the accountant NOT charge half of her month’s salary to the project?
Because her salary cannot be apportioned
Because her salary is not incremental
Because her salary is not a cash flow
Because her salary is an opportunity cost
A newspaper reader has won first prize in a national competition and they have a choice as to how they take the prize:
Option 1 - Take $90,000 per annum indefinitely starting in 3 years’ time (and bequeath this right to their children and so on); or
Option - 2 Take a lump sum of $910,000 in 1 year’s time.
Assuming a cost of capital of 10%, which would you advise and why?
Option 1 because $90,000 pa indefinitely is an infinite amount of money compared to a one-off payment
Option 1 because it is worth more in present value terms
Option 2 because it is worth more in present value terms
Option 2 because the lump sum has the flexibility to be invested and earn a larger return than $90,000 pa
JCW Co is appraising an opportunity to invest in some new machinery that has the following cash flows.
Initial investment $40,000
Net cash inflows for 5 years in advance $12,000 per annum
Decommissioning costs after 5 years $15,000
At a cost of capital of 10% what is the net present value of this project (to the nearest $100)?
$720
$725
$700
Nil
Which of the following are correct advantages of the IRR approach to investment appraisal?
Clear decision rule
Takes into account the time value of money
Assumes funds are reinvested at the IRR
None of them
Which of the following statements about NPV and IRR is accurate?
Two NPV calculations are needed to estimate the IRR using linear interpolation.
The graphical approach to IRR is only an estimate; linear interpolation using the formula is required for a precise answer
The IRR is unique.
T An IRR graph with NPV on the 'Y' axis and discount rate on the 'X' axis will have a negative slope
A lease agreement has an NPV of ($26,496) at a rate of 8%. The lease involves an immediate down payment of $10,000 followed by 4 equal annual payments.
What is the amount of the annual payment?
$11,020
$4,981
$11,513
$14,039
A company receives a perpetuity of $20,000 per annum 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
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
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 annum, 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)
NCW Co is considering investing $10,000 immediately in a 1-year project with the following cash flows. Income $100,000 Expenses $35,000 The cash flows will arise at the end of the year. The above are stated in current terms. Income is subject to 10% inflation; expenses will not vary.
The real cost of capital is 8% and general inflation is 2%.
Using the money cost of capital to the nearest whole percentage, what is the net present value of the project?
$68,175
$60,190
$58,175
$78,175
W Co is expecting a receipt of $10,000 (in real terms) in 1 year’s time. If FW Co expects inflation to increase, and receipts are expected to rise in line with the general rate of inflation, what impact will this have on the present value of that receipt?
Nil
Reduce
Increase
Cannot say
Which of the following is true about the ‘inflation’ figure that is included in the money cost of capital?
It is historic and specific to the business
It is historic general inflation suffered by the investors.
It is expected and specific to the business.
It is expected general inflation suffered by the investors.
Which of the following statements is 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 soft capital rationing
Which of the following statements is correct?
One of the problems with maximising accounting profit as a financial objective is that accounting profit can be manipulated
A target for a minimum level of dividend cover is a target for a minimum dividend payout ratio
The welfare of employees is a financial objective
One reason shareholders are interested in earnings per share is that accounting profit takes account of risk
Which of the following statements is NOT correct?
Return on capital employed can be defined as profit before interest and tax divided by the sum of shareholders’ funds and prior charge capital
Return on capital employed is the product of net profit margin and net asset turnover
Dividend yield can be defined as dividend per share divided by the ex dividend share price
Return on equity can be defined as profit before interest and tax divided by shareholders’ funds
Which of the following statements are correct?
(1) The sensitivity of a project variable can be calculated by dividing the project net present value by the present value of the cash flows relating to that project variable
(2) The expected net present value is the value expected to occur if an investment project with several possible outcomes is undertaken once
(3) The discounted payback period is the time taken for the cumulative net present value to change from negative to positive.
1 and 2 only
1 and 3 only
2 and 3 only
1, 2 and 3
Using discount rates of 15% and 20%, what is the internal rate of return of the investment project? (to one decimal place)
17%
17.2%
17.5%
17.8%
An accountant is paid $30,000 per annum and spends 2 weeks working on appraising project Alpha.
Why should the accountant NOT charge half of her month's salary to the project?
Because her salary cannot be apportioned
Because her salary is not incremental
Because her salary is not a cash flow
Because her salary is an opportunity cost
