WorksheetsTHE TIME VALUE OF MONEY & INVESTMENT ANALYSIS
Total questions: 20
Worksheet time: 14mins
Choose the incorrect statement
Capital budgeting goal is to accept a project which maximizes the shareholder wealth
Capital budgeting is based on forecasting
Payback period is the number of years needed to recover your initial investment
Capital budegeting involves identifying, analyzing and selecting projects whose returns are expected within a year
The (a) method can correct this shortcoming of the payback method that does not consider the time value of money
If there is a conflict between the decisions based on NPV and IRR methods, which method will be best for project evaluation?
NPV
IRR
Classification of Projects
(a) - accept ONE project only
Select the disadvantages of payback period
It does not consider the time value of money
It does not consider the cash flows beyond the payback period
It does not consider the cash initial outlay beyond the payback period
It does not consider the time taken to recover back initial investment
Choose the following evaluation method that considers time value of money
Payback period
Net present value
Internal rate of return
Profitability Index
By using IRR, we assumes that cash flows are reinvested at ________.
the lower of the firm’s discount rate
an average of the internal rate of return and the discount rate
the internal rate of return
the firm’s discount rate
The conflict of decision may arises if ________ or _________
there is difference in sizes of the projects
there is difference in discount rate use
there is difference in the time value of money
there is difference in the timing of cash flows
NPV assumes cash flows are reinvested at the (a)
The _________ is the ratio of initial outlay to the present value of Inflows
Profitability Index
Net Present Value
Internal Rate of Return
Payback Period
________ measures the rate of return that will make the PV of future CF equal to the initial outlay.
Net present value
Internal rate of return
Payback period
Profitability index
The IRR is that discount rate at which (a)
PV of Inflows - Initial Outlay =
Profitability index
Net present value
Payback period
Internal rate of return
A - Cash inflow from year 1 until 5 = RM 2,500
B - Cash inflow from year 1 until 3 = RM 2,000, year 4 and 5 = RM 3,000
C - Cash inflow from year 1 and 2 = RM 3,000, year 3 until 5 = RM 4,000
Initial outlay = RM 10,000
Maximum payback period = 4 years
Which project/s will be chosen?
Project A and B
Project A
Project A and C
Project B and C
Company A invests RM 250,000 in a project that is expected to have cash inflow of RM 50,000 for year 1 and 2, and RM 100,000 for year 1 until 6. Calculate the payback period
(a)
Initial outlay = RM 1 million
Cash inflows from year 1 until 5 = RM 250,000
Discount rate = 8%
Calculate the NPV
(a)
Initial outlay = RM 1 million
Cash inflows from year 1 until 5 = RM 250,000
Discount rate = 8%
Calculate the PI
(a)
It focuses on accounting net operating income. The approach is to estimate the revenue that will be generated by a proposed investment of some project.
The statement is about________
Internal rate of return
Net present value
Profitability index
Simple rate of return
The following statement are related to simple rate of return EXCEPT
calculated at NPV = 0
It takes into account the time value of money
Also known as the the unadjusted rate of return, and the financial statement method
It can shown how much a company expects to make off of a capital investment every year
Initial outlay = RM 200,000
Cash inflows from year 1 until 4 = RM 70,000
Calculate the simple rate of return
(a)
