Complete Test Bank Capital Investment Appraisal Chapter.16

Chapter 16: Capital Investment Appraisal

Test Bank

Type: multiple response question

Title: Chapter 16 Question 01

1) Which of the following statements describe capital investment?

Please select all that apply.

Heading reference: Introduction, What is capital investment?

a. Long-term investment.

b. Used to fund day to day operations.

c. Generates profit and cash flows over several years.

d. Money spent now to benefit the future.

Type: true-false

Title: Chapter 16 Question 02

2) Costing and capital investment both aim to maximize returns for a business.

a. True

Heading reference: Introduction, What is capital investment?

b. False

Heading reference: Introduction, What is capital investment?

Type: true-false

Title: Chapter 16 Question 03

3) Capital investment = the acquisition of short-term assets.

a. True

Heading reference:

Assets in the statement of financial position

The distinction between non-current and current assets

What is capital investment?

b. False

Heading reference:

Assets in the statement of financial position

The distinction between non-current and current assets

What is capital investment?

Type: multiple choice question

Title: Chapter 16 Question 04

4) Which one of the following statements does not describe the function of capital investment appraisal?

a. Capital investment appraisal is concerned with maximizing shareholder value over the short term.

Heading reference: What is capital investment?, Why is capital investment appraisal important?

b. Capital investment appraisal is used to determine the most profitable investments available to an entity.

Heading reference: What is capital investment?, Why is capital investment appraisal important?

c. Capital investment appraisal is a control mechanism to enable entities to distinguish between projects competing for scarce capital resources.

Heading reference: What is capital investment?, Why is capital investment appraisal important?

d. Capital investment appraisal is used to determine whether investments in new projects and new non-current assets will represent valuable returns for an entity or not.

Heading reference: What is capital investment?, Why is capital investment appraisal important?

Type: true-false

Title: Chapter 16 Question 05

5) Capital investment appraisal takes into account opportunity cost.

a. True

Heading reference: Relevant costs: opportunity cost, Why is capital investment appraisal important?

b. False

Heading reference: Relevant costs: opportunity cost, Why is capital investment appraisal important?

Type: multiple response question

Title: Chapter 16 Question 06

6) Why do organizations undertake capital investment appraisal?

Please select all that apply.

Heading reference: Why is capital investment appraisal important?

a. To determine whether proposed projects will make a valuable addition to current operations.

b. To enable all proposed projects to be undertaken.

c. To decide whether proposed projects will generate a positive return for shareholders.

d. To assess whether proposed projects will meet the organization’s required rate of return on capital invested.

Type: multiple choice question

Title: Chapter 16 Question 07

7) Which one of the following is a characteristic of the payback method of capital investment appraisal but not a characteristic of the accounting rate of return?

a. A measure based on a percentage return rather than a measure based on total cash inflows – total cash outflows.

Heading reference:

Capital investment appraisal techniques: comprehensive example

Capital investment appraisal techniques

Accounting rate of return: the decision criteria

b. A relative rather than an absolute measure.

Heading reference: Accounting rate of return: the decision criteria

c. Ignores the time value of money.

Heading reference: Accounting rate of return: the decision criteria

d. Distinguishes between projects with higher and lower initial net cash inflows.

Heading reference:

Capital investment appraisal techniques: comprehensive example

Capital investment appraisal techniques

Accounting rate of return: the decision criteria

Type: multiple choice question

Title: Chapter 16 Question 08

8) Which one of the following statements does not describe the net present value method of capital investment appraisal?

a. The net present value of the net cash inflows – the net present value of the cost of an investment = the net present value of the project.

Heading reference: Business investment and the time value of money, Net present value

b. Uses a discount rate to calculate the point at which the discounted present value of the net cash inflows = the net present value of the investment in the project.

Heading reference: Business investment and the time value of money, Net present value

c. Discounts net cash inflows that arise later in a project’s life at a higher discount rate to recognize the increased risk attached to cash received further in the future.

Heading reference: Business investment and the time value of money, Net present value

d. The results of this investment appraisal technique are truly comparable as all of a project’s net cash inflows are presented in units of common currency i.e. in units of current spending power.

Heading reference: Business investment and the time value of money, Net present value

Type: multiple response question

Title: Chapter 16 Question 09

9) Which of the following statements do not describe the payback method of capital investment appraisal? Please select all that apply.

Heading reference:

Payback

Accounting rate of return: the decision criteria

Net present value: the decision criteria

Internal rate of return: the decision criteria

a. Calculates the number of years over which the original cost of the investment will be repaid.

b. Does not ignore the cash flows after the payback period is complete.

c. Does not ignore the time value of money.

d. Differentiates between projects that generate the majority of net cash inflows in the early stages of a project’s life.

Type: multiple response question

Title: Chapter 16 Question 10

10) Which of the following steps are involved in the calculation of the accounting rate of return of a proposed project? Please select all that apply.

Heading reference: Accounting rate of return, Internal rate of return: the decision criteria

a. Calculate the total cash inflows expected from the proposed project.

b. Calculate total depreciation expected on the total investment in the proposed project.

c. Calculate the discount rate at which the total cash inflows from the proposed project equal the total cash outflows from the proposed project.

d. Calculate the average capital employed over the life of the proposed project.

Type: multiple choice question

Title: Chapter 16 Question 11

11) Which one of the following would not be a step in the payback method of capital investment appraisal?

a. Determining the cash outflows associated with the proposed investment project.

Heading reference:

Capital investment appraisal techniques: comprehensive example

Capital investment appraisal techniques

Payback

b. Determining the cash inflows associated with the proposed investment project.

Heading reference:

Capital investment appraisal techniques: comprehensive example

Capital investment appraisal techniques

Payback

c. Determining the depreciation on the investment in the proposed investment project.

Heading reference: from ‘Capital investment appraisal techniques: comprehensive example’ to ‘ARR step 5 calculate the accounting rate of return’

d. Ranking the projects according to the length of time taken to repay the initial investment in each proposed investment project.

Heading reference:

Capital investment appraisal techniques: comprehensive example

Capital investment appraisal techniques

Payback

Type: true-false

Title: Chapter 16 Question 12

12) As the discount rate applied to the cash flows from a proposed investment project decreases, the net present value of those cash flows rises.

a. True

Heading reference: Internal rate of return (IRR)

b. False

Heading reference: Internal rate of return (IRR)

Type: multiple choice question

Title: Chapter 16 Question 13

13) BTB Limited is investing £400,000 into a new project. The project will last for four years. At the end of the four years, the project assets will be sold for £100,000. Depreciation on project assets is provided on the straight-line basis over four years. The net cash inflows from the project in years 1 to 4 are expected to be £150,000 per annum. What is the payback period for this project?

a. This project does not have a payback period.

Heading reference: Payback

b. 2 years 0 months

Heading reference: Payback

c. 2 years 8 months

Heading reference: Payback

d. 4 years 0 months

Heading reference: Payback

Type: multiple choice question

Title: Chapter 16 Question 14

14) VCV Limited is investing £500,000 into a new project. The project will last for five years. At the end of the five years, the project assets will be sold for £200,000. Depreciation on project assets is provided on the straight-line basis over five years. The net cash inflows from the project in years 1 to 5 are expected to be £50,000, £100,000, £150,000, £200,000 and £250,000. What is the payback period for this project?

a. This project does not have a payback period.

Heading reference: Payback

b. 2 years 4 months

Heading reference: Payback

c. 3 years 0 months

Heading reference: Payback

d. 4 years 0 months

Heading reference: Payback

Type: multiple choice question

Title: Chapter 16 Question 15

15) BGG Limited is investing £700,000 into a new project today. The project will last for five years. A further investment into the project of £100,000 will be made at the end of year 3 of the project’s life. At the end of the five years, all the project assets will be sold for £200,000. Depreciation on project assets is provided on the straight-line basis over five years. The net cash inflows from the project in years 1 to 5 are expected to be £200,000, £220,000, £240,000, £280,000 and £260,000. What is the payback period for this project?

a. 1 year 0 months

Heading reference: Payback

b. 2 years 4 months

Heading reference: Payback

c. 2 years 9 months

Heading reference: Payback

d. 3 years 6 months

Heading reference: Payback

Type: multiple choice question

Title: Chapter 16 Question 16

16) BDS Limited is planning to invest in a new project. The project will last for four years. Depreciation on project assets is provided on the straight-line basis over the period of the project and depreciation of £560,000 will be charged on the project assets over the four years. £560,000 represents 70% of the cash outlay on non-current assets for the project. Net cash inflows from the project in years 1 to 4 are expected to be £190,000, £240,000, £260,000 and £264,000. It is anticipated that the project assets will be sold for their carrying amount at the end of year 4. What is the payback period for this project to the nearest month?

a. 1 year 10 months

Heading reference: Payback

b. 2 years 6 months

Heading reference: Payback

c. 3 years 5 months

Heading reference: Payback

d. 4 years 0 months

Heading reference: Payback

Type: multiple choice question

Title: Chapter 16 Question 17

17) TGV Limited is planning to invest in a new project. The project will last for five years. Depreciation on project assets is provided on the reducing balance basis over the life of the project. Depreciation will be charged at the rate of 40% per annum and the carrying amount of the assets used in the project at the end of 5 years will be £69,984. Net cash inflows from the project in years 1 to 5 are expected to be £215,000, £255,000, £270,000, £240,000 and £200,000. It is anticipated that the project assets will be sold for their carrying amount at the end of year 5. What is the payback period for this project to the nearest month?

a. This project does not have a payback period.

Heading reference: Payback

b. 4 months

Heading reference: Payback

c. 2 years 3 months

Heading reference: Payback

d. 3 years 8 months

Heading reference: Payback

Type: multiple choice question

Title: Chapter 16 Question 18

18) Mason Limited is evaluating a proposed capital investment project. The initial investment will be £900,000. The initial investment will have a residual value of £100,000 when the project comes to an end in 5 years’ time. Net cash inflows from the project will be £200,000 in year 1, £300,000 in year 2, £400,000 in year 3, £350,000 in year 4 and £250,000 in year 5. What is the accounting rate of return of this project?

a. 28%

Heading reference: Accounting rate of return

b. 35%

Heading reference: Accounting rate of return

c. 60%

Heading reference: Accounting rate of return

d. 75%

Heading reference: Accounting rate of return

Type: multiple choice question

Title: Chapter 16 Question 19

19) VCV Limited is investing £500,000 into a new project. The project will last for five years. At the end of the five years, the project assets will be sold for £200,000. Depreciation on project assets is provided on the straight-line basis over five years. The expected net cash inflows from the project in years 1 to 5 are expected to be £50,000, £100,000, £150,000, £200,000 and £250,000. What is the accounting rate of return for this project?

a. 25.71%

Heading reference: Accounting rate of return

b. 36.00%

Heading reference: Accounting rate of return

c. 42.86%

Heading reference: Accounting rate of return

d. 60.00%

Heading reference: Accounting rate of return

Type: multiple choice question

Title: Chapter 16 Question 20

20) BGV Limited is investing £700,000 into a new project today. The project will last for five years. At the end of the five years, the project assets will have a £nil resale value and will be scrapped at a cost of £60,000. Depreciation on project assets is provided on the straight-line basis over five years. The expected net cash inflows from the project in years 1 to 5 are expected to be £200,000, £220,000, £240,000, £180,000 and £160,000. What is the accounting rate of return for this project?

a. 12.63%

Heading reference: Accounting rate of return

b. 13.71%

Heading reference: Accounting rate of return

c. 15.79%

Heading reference: Accounting rate of return

d. 17.14%

Heading reference: Accounting rate of return

Type: multiple choice question

Title: Chapter 16 Question 21

21) BDS Limited is planning to invest in a new project. The project will last for four years. Depreciation on project assets is provided on the straight-line basis over the period of the project and depreciation of £480,000 will be charged on the project assets over the four years. £480,000 represents 60% of the cash outlay on non-current assets for the project. Net cash inflows from the project in years 1 to 4 are expected to be £200,000, £240,000, £265,000 and £225,000. It is anticipated that the project assets will be sold for their carrying amount at the end of year 4. What is the accounting rate of return for this project?

a. 5.80%

Heading reference: Accounting rate of return

b. 17.58%

Heading reference: Accounting rate of return

c. 20.09%

Heading reference: Accounting rate of return

d. 27.23%

Heading reference: Accounting rate of return

Type: multiple choice question

Title: Chapter 16 Question 22

22) BFT Limited is planning to invest in a new project. The project will last for four years and cost £800,000. Depreciation on project assets is provided on the reducing balance basis at the rate of 25% over the life of the project. Net cash inflows from the project in years 1 to 4 are expected to be £225,000, £250,000, £275,000 and £210,000. It is anticipated that the project assets will be sold for their carrying amount at the end of year 4. What is the accounting rate of return for this project?

a. 9.81%

Heading reference: Accounting rate of return

b. 10.00%

Heading reference: Accounting rate of return

c. 12.48%

Heading reference: Accounting rate of return

d. 19.61%

Heading reference: Accounting rate of return

Type: multiple choice question

Title: Chapter 16 Question 23

23) The directors of PDD Limited are considering an investment in a new project. The project will cost £800,000 and will have a resale value at the end of 4 years of £200,000. Net cash inflows are expected to be £300,000 in year 1, £250,000 in year 2, £400,000 in year 3 and £50,000 in year 4. PDD Limited has a required rate of return of 12%. What is the net present value of this project?

a. Negative net present value of – £16,335

Heading reference: Business investment and the time value of money, Net present value

b. Positive net present value of £110,765

Heading reference: Business investment and the time value of money, Net present value

c. Positive net present value of £183,665

Heading reference: Business investment and the time value of money, Net present value

d. Positive net present value of £310,765

Heading reference: Business investment and the time value of money, Net present value

Type: multiple choice question

Title: Chapter 16 Question 24

24) The directors of DPD Limited are considering a new investment proposal. The project will require an initial investment of £300,000 and a further investment at the end of year 3 of £150,000. Net cash inflows in years 1 to 5 are expected to be £75,000, £150,000, £225,000, £300,000 and £360,000. At the end of 5 years, the project will be discontinued and the project assets will be sold for an expected £100,000. DPD Limited has a required rate of return of 9%. What is the net present value of this proposal?

a. £365,289

Heading reference: Business investment and the time value of money, Net present value

b. £430,279

Heading reference: Business investment and the time value of money, Net present value

c. £464,449

Heading reference: Business investment and the time value of money, Net present value

d. £580,279

Heading reference: Business investment and the time value of money, Net present value

Type: multiple choice question

Title: Chapter 16 Question 25

25) VCV Limited is investing £500,000 into a new project. The project will last for five years. At the end of the five years, the company will have to pay £50,000 to scrap the project’s assets. The net cash inflows from the project in years 1 to 5 are expected to be £50,000, £100,000, £150,000, £200,000 and £250,000. VCV Limited has a required rate of return of 11%. What is the net present value of this project?

a. Negative net present value of – £13,675

Heading reference: Business investment and the time value of money, Net present value

b. Positive net present value of + £16,000

Heading reference: Business investment and the time value of money, Net present value

c. Negative net present value of – £34,000

Heading reference: Business investment and the time value of money, Net present value

d. Positive net present value of + £45,675

Heading reference: Business investment and the time value of money, Net present value

Type: multiple choice question

Title: Chapter 16 Question 26

26) BGG Limited is investing £700,000 into a new project today. The project will last for five years. A further investment into the project of £100,000 will be made at the end of year 2 of the project’s life. At the end of the five years, all the project assets will be sold for £200,000. Depreciation on project assets is provided on the straight-line basis over five years. The net cash inflows from the project in years 1 to 5 are expected to be £200,000, £220,000, £240,000, £280,000 and £260,000. BGG’s cost of capital is 15%. What is the net present value of this project?

a. Negative net present value of – £87,612

Heading reference: Business investment and the time value of money, Net present value

b. Positive net present value of + £11,828

Heading reference: Business investment and the time value of money, Net present value

c. Positive net present value of + £111,268

Heading reference: Business investment and the time value of money, Net present value

d. Positive net present value of + £186,878

Heading reference: Business investment and the time value of money, Net present value

Type: multiple choice question

Title: Chapter 16 Question 27

27) BVC Limited is investing £900,000 into a new project today. The project will last for five years. At the end of year 3 of the project’s life, half of the assets will be sold for £200,000. At the end of the five years, the remaining project assets will be sold for £50,000. The net cash inflows from the project in years 1 to 5 are expected to be £180,000, £240,000, £280,000, £320,000 and £220,000. BVC’s cost of capital is 9%. What is the net present value of this project?

a. Positive net present value of + £20,527

Heading reference: Business investment and the time value of money, Net present value

b. Positive net present value of + £85,517

Heading reference: Business investment and the time value of money, Net present value

c. Positive net present value of + £174,967

Heading reference: Business investment and the time value of money, Net present value

d. Positive net present value of + £239,957

Heading reference: Business investment and the time value of money, Net present value

Type: multiple choice question

Title: Chapter 16 Question 28

28) Dixon Limited has undertaken various capital investment appraisal calculations. Using a discount rate of 16%, the company has determined that its proposed investment project has a positive net present value of £100,000. Using a discount rate of 21%, the company has determined that its proposed investment project will have a negative net present value of £25,000. Given the above net present value calculations, what is the internal rate of return of the proposed investment project?

a. 17.00%

16% + £100,000 x (21% – 16%) = 20%

(£100,000 + £25,000)

Where 16% is the discount rate giving a positive NPV for the project, 21% is the discount rate giving a negative NPV for the project, £100,000 is the positive NPV of the project at a discount rate of 16% and £25,000 is the negative NPV of the project at a discount rate of 21%.

Your calculation was as follows:

16% + £25,000 x (21% – 16%) = 17%

(£100,000 + £25,000)

Heading reference: Internal rate of return (IRR)

b. 17.25%

16% + £100,000 x (21% – 16%) = 20%

(£100,000 + £25,000)

Where 16% is the discount rate giving a positive NPV for the project, 21% is the discount rate giving a negative NPV for the project, £100,000 is the positive NPV of the project at a discount rate of 16% and £25,000 is the negative NPV of the project at a discount rate of 21%.

Your calculation was as follows

16% + £25,000 x (21% – 16%) = 17.25%

£100,000

Heading reference: Internal rate of return (IRR)

c. 20.00%

16% + £100,000 x (21% – 16%) = 20%

(£100,000 + £25,000)

Where 16% is the discount rate giving a positive NPV for the project, 21% is the discount rate giving a negative NPV for the project, £100,000 is the positive NPV of the project at a discount rate of 16% and £25,000 is the negative NPV of the project at a discount rate of 21%.

Heading reference: Internal rate of return (IRR)

d. 22.25%

16% + £100,000 x (21% – 16%) = 20%

(£100,000 + £25,000)

Where 16% is the discount rate giving a positive NPV for the project, 21% is the discount rate giving a negative NPV for the project, £100,000 is the positive NPV of the project at a discount rate of 16% and £25,000 is the negative NPV of the project at a discount rate of 21%.

Your calculation was as follows:

16% + (£100,000 + £25,000) x (21% – 16%) = 22.25%

£100,000

Heading reference: Internal rate of return (IRR)

Type: multiple choice question

Title: Chapter 16 Question 29

29) The directors of TZA Limited are evaluating a new investment project which has a positive net present value of £4,000 when the project cash flows are discounted at a rate of 12%. When the investment project cash flows are discounted at the rate of 17%, the net present value of the project is – £2,000. What is the internal rate of return of the new investment project?

a. 13.67%

12% + £4,000 x (17% – 12%) = 15.33%

(£4,000 + £2,000)

Where 12% is the discount rate giving a positive NPV for the project, 17% is the discount rate giving a negative NPV for the project, £4,000 is the positive NPV of the project at a discount rate of 12% and £2,000 is the negative NPV of the project at a discount rate of 17%.

Your calculation was as follows:

12% + (£2,000) x (17% – 12%) = 13.67%

(£4,000 + £2,000)

Heading reference: Internal rate of return (IRR)

b. 14.50%

12% + £4,000 x (17% – 12%) = 15.33%

(£4,000 + £2,000)

Where 12% is the discount rate giving a positive NPV for the project, 17% is the discount rate giving a negative NPV for the project, £4,000 is the positive NPV of the project at a discount rate of 12% and £2,000 is the negative NPV of the project at a discount rate of 17%.

Your calculation was as follows:

12% + (£2,000) x (17% – 12%) = 14.50%

(£4,000)

Heading reference: Internal rate of return (IRR)

c. 15.33%

12% + £4,000 x (17% – 12%) = 15.33%

(£4,000 + £2,000)

Where 12% is the discount rate giving a positive NPV for the project, 17% is the discount rate giving a negative NPV for the project, £4,000 is the positive NPV of the project at a discount rate of 12% and £2,000 is the negative NPV of the project at a discount rate of 17%.

Heading reference: Internal rate of return (IRR)

d. 17.00%

12% + £4,000 x (17% – 12%) = 15.33%

(£4,000 + £2,000)

Where 12% is the discount rate giving a positive NPV for the project, 17% is the discount rate giving a negative NPV for the project, £4,000 is the positive NPV of the project at a discount rate of 12% and £2,000 is the negative NPV of the project at a discount rate of 17%.

Your calculation was as follows:

12% + (£4,000) x (17% – 12%) = 17.00%

(£4,000)

Heading reference: Internal rate of return (IRR)

Type: multiple choice question

Title: Chapter 16 Question 30

30) VCV Limited is planning a capital investment. Using a discount rate of 11%, the company has determined that its proposed investment project has a negative net present value of – £13,675. Using a discount rate of 9%, the company has determined that its proposed investment project will have a positive net present value of £17,530. Given the above net present value calculations, what is the internal rate of return of the proposed investment project to two decimal places?

a. 6.44%

11% – £13,675 x (11% – 9%) = 10.12%

(£13,675 + £17,530)

Where 11% is the discount rate giving a negative NPV for the project, 9% is the discount rate giving a positive NPV for the project, £13,675 is the negative NPV of the project at a discount rate of 11% and £17,530 is the positive NPV of the project at a discount rate of 9%.

Your calculation was as follows:

11% – (£17,530 + £13,675) x (11% – 9%) = 6.44%

£13,675

Heading reference: Internal rate of return (IRR

b. 9.44%

11% – £13,675 x (11% – 9%) = 10.12%

(£13,675 + £17,530)

Where 11% is the discount rate giving a negative NPV for the project, 9% is the discount rate giving a positive NPV for the project, £13,675 is the negative NPV of the project at a discount rate of 11% and £17,530 is the positive NPV of the project at a discount rate of 9%.

Your calculation was as follows:

11% – £13,675 x (11% – 9%) = 9.44%

£17,530

Heading reference: Internal rate of return (IRR)

c. 9.88%

11% – £13,675 x (11% – 9%) = 10.12%

(£13,675 + £17,530)

Where 11% is the discount rate giving a negative NPV for the project, 9% is the discount rate giving a positive NPV for the project, £13,675 is the negative NPV of the project at a discount rate of 11% and £17,530 is the positive NPV of the project at a discount rate of 9%.

Your calculation was as follows

11% – £17,530 x (11% – 9%) = 9.88%

(£13,675 + £17,530)

Heading reference: Internal rate of return (IRR)

d. 10.12%

11% – £13,675 x (11% – 9%) = 10.12%

(£13,675 + £17,530)

Where 11% is the discount rate giving a negative NPV for the project, 9% is the discount rate giving a positive NPV for the project, £13,675 is the negative NPV of the project at a discount rate of 11% and £17,530 is the positive NPV of the project at a discount rate of 9%.

Heading reference: Internal rate of return (IRR)

Type: multiple choice question

Title: Chapter 16 Question 31

31) VKU Limited is planning a capital investment. Using a discount rate of 15%, the company has determined that its proposed investment project has a positive net present value of + £15,280. Using a discount rate of 19%, the company has determined that its proposed investment project will have a negative net present value of £3,660. Given the above net present value calculations, what is the internal rate of return of the proposed investment project to two decimal places?

a. 15.77%

15% + £15,280 x (19% – 15%) = 18.23%

(£15,280 + £3,660)

Where 15% is the discount rate giving a positive NPV for the project, 19% is the discount rate giving a negative NPV for the project, £15,280 is the positive NPV of the project at a discount rate of 15% and £3,660 is the negative NPV of the project at a discount rate of 19%.

Your calculation was as follows

15% + £3,660 x (19% – 15%) = 15.77%

(£15,280 + £3,660)

Heading reference: Internal rate of return (IRR)

b. 15.96%

15% + £15,280 x (19% – 15%) = 18.23%

(£15,280 + £3,660)

Where 15% is the discount rate giving a positive NPV for the project, 19% is the discount rate giving a negative NPV for the project, £15,280 is the positive NPV of the project at a discount rate of 15% and £3,660 is the negative NPV of the project at a discount rate of 19%.

Your calculation was as follows:

15% + £3,660 x (19% – 15%) = 15.96%

£15,280

Heading reference: Internal rate of return (IRR)

c. 18.23%

15% + £15,280 x (19% – 15%) = 18.23%

(£15,280 + £3,660)

Where 15% is the discount rate giving a positive NPV for the project, 19% is the discount rate giving a negative NPV for the project, £15,280 is the positive NPV of the project at a discount rate of 15% and £3,660 is the negative NPV of the project at a discount rate of 19%.

Heading reference: Internal rate of return (IRR)

d. 19.96%

15% + £15,280 x (19% – 15%) = 18.23%

(£15,280 + £3,660)

Where 15% is the discount rate giving a positive NPV for the project, 19% is the discount rate giving a negative NPV for the project, £15,280 is the positive NPV of the project at a discount rate of 15% and £3,660 is the negative NPV of the project at a discount rate of 19%.

Your calculation was as follows:

15% + (£15,280 + £3,660) x (19% – 15%) = 19.96%

£15,280

Heading reference: Internal rate of return (IRR)

Type: multiple choice question

Title: Chapter 16 Question 32

32) XTA Limited is planning a capital investment. Using a discount rate of 14%, the company has determined that its proposed investment project has a negative net present value of – £2,530. Using a discount rate of 10%, the company has determined that its proposed investment project will have a positive net present value of £22,468. Given the above net present value calculations, what is the internal rate of return of the proposed investment project to two decimal places?

a. 9.55%

14% – £2,530 x (14% – 10%) = 13.60%

(£2,530 + £22,468)

Where 14% is the discount rate giving a negative NPV for the project, 10% is the discount rate giving a positive NPV for the project, £2,530 is the negative NPV of the project at a discount rate of 14% and £22,468 is the positive NPV of the project at a discount rate of 10%.

Your calculation was as follows:

14% – (£2,530 + £22,468) x (14% – 10%) = 9.55%

£22,468

Heading reference: Internal rate of return (IRR)

b. 10.40%

Feedback The correct calculation is as follows:

14% – £2,530 x (14% – 10%) = 13.60%

(£2,530 + £22,468)

Where 14% is the discount rate giving a negative NPV for the project, 10% is the discount rate giving a positive NPV for the project, £2,530 is the negative NPV of the project at a discount rate of 14% and £22,468 is the positive NPV of the project at a discount rate of 10%.

Your calculation was as follows

14% – £22,468 x (14% – 10%) = 10.40%

(£2,530 + £22,468)

Heading reference: Internal rate of return (IRR)

c. 13.55%

14% – £2,530 x (14% – 10%) = 13.60%

(£2,530 + £22,468)

Where 14% is the discount rate giving a negative NPV for the project, 10% is the discount rate giving a positive NPV for the project, £2,530 is the negative NPV of the project at a discount rate of 14% and £22,468 is the positive NPV of the project at a discount rate of 10%.

Your calculation was as follows:

14% – £2,530 x (14% – 10%) = 13.55%

£22,468

Heading reference: Internal rate of return (IRR)

d. 13.60%

14% – £2,530 x (14% – 10%) = 13.60%

(£2,530 + £22,468)

Where 14% is the discount rate giving a negative NPV for the project, 10% is the discount rate giving a positive NPV for the project, £2,530 is the negative NPV of the project at a discount rate of 14% and £22,468 is the positive NPV of the project at a discount rate of 10%.

Heading reference: Internal rate of return (IRR)

Type: multiple choice question

Title: Chapter 16 Question 33

33) Which one of the following is a limitation of the payback technique of capital investment appraisal?

a. It is simple and easy to calculate.

Heading reference: Payback

b. Considers the time value of money.

Heading reference: Payback

c. It is based on accounting profits.

Heading reference: Payback

d. Fails to take into account the magnitude of net cash inflows after the initial investment cost has been recovered.

Heading reference: Payback

Type: multiple choice question

Title: Chapter 16 Question 34

34) Which one of the following is not a limitation of the internal rate of return investment appraisal technique?

a. The technique assumes that the cash inflows and outflows arising from an investment project can be predicted accurately.

Heading reference: Net present value: limitations, Internal rate of return: the decision criteria

b. The technique does not require organizations to specify a cost of capital in advance but allows users to determine whether the rate of return is acceptable or not.

Heading reference: Internal rate of return: advantages, Internal rate of return: limitations

c. The technique cannot be applied in the evaluation of investment proposals which generate irregular cash flows.

Heading reference: Internal rate of return: advantages, Internal rate of return: limitations

d. The technique relies on the mathematical technique of interpolation which results in the internal rate of return being an estimate rather than an accurate figure.

Heading reference: Internal rate of return: advantages, Internal rate of return: limitations

Type: multiple choice question

Title: Chapter 16 Question 35

35) Which one of the following does not describe a limitation of the accounting rate of return method of capital investment appraisal?

a. It ignores the time value of money.

Heading reference: Accounting rate of return: the decision criteria

b. It is a percentage rather than an absolute value.

Heading reference: Ratios, figures or both?, Accounting rate of return: the decision criteria

c. Fails to distinguish between projects that repay the majority of the initial investment in the early years of the project’s life.

Heading reference: Accounting rate of return: the decision criteria

d. Cannot be used in situations where cash flows turn from being inflows to outflows and back again.

Heading reference: Accounting rate of return: the decision criteria, Internal rate of return: the decision criteria

Type: multiple choice question

Title: Chapter 16 Question 36

36) Which one of the following is a disadvantage of the net present value method of capital investment appraisal?

a. Can be used in conjunction with the payback method of capital investment appraisal to determine when the discounted cash flows from a project pay back the original cost of the investment in that project.

Heading reference: Net present value: the decision criteria

b. Discounts all cash inflows and outflows associated with a project into a common currency.

Heading reference: Net present value: the decision criteria

c. Makes a large number of assumptions about cash flows and the cost of capital.

Heading reference: Net present value: the decision criteria

d. Cannot be used in situations where cash flows turn from being inflows to outflows and back again.

Heading reference: Net present value: the decision criteria, Internal rate of return: the decision criteria

Type: multiple choice question

Title: Chapter 16 Question 37

37) Interest rates are 10%. What is the present value of £60,000 receivable in 6 years’ time?

a. £30,789

Heading reference: The time value of money

b. £33,868

Heading reference: The time value of money

c. £37,255

Heading reference: The time value of money

d. £106,294

Heading reference: The time value of money

Type: true-false

Title: Chapter 16 Question 38

38) £10,000 today = £13,108 in 4 years’ time when interest rates stand at 7%.

a. True

Heading reference: The time value of money

b. False

Heading reference: The time value of money

Type: true-false

Title: Chapter 16 Question 39

39) Money received tomorrow is just as valuable as money received today.

a. True

Heading reference: The time value of money

b. False

Heading reference: The time value of money

Type: true-false

Title: Chapter 16 Question 40

40) Companies use their cost of capital to compensate for the risk they take on in investing in new projects and ventures.

a. True

Heading reference: The time value of money

b. False

Heading reference: The time value of money

Type: multiple choice question

Title: Chapter 16 Question 41

41) A proposed investment is projected to generate £180,000 a year for four years. An additional investment of £80,000 is budgeted at the end of year 2 of the project and the project assets are expected to be sold for £50,000 at the end of year 4. The company proposing the project has a cost of capital of 10%. The net present value of the project is £70,002. What is the cost of the initial investment into the project at T0?

a. £388,600

b. £434,450

c. £468,600

d. £538,602

Type: multiple choice question

Title: Chapter 16 Question 42

42) TPT Limited is planning to invest in a new project. The project will last for five years. Depreciation on project assets is provided on the straight-line basis over five years and will amount to £40,000 per annum. Net cash inflows from the project in years 1 to 5 are budgeted to be £80,000, £100,000, £120,000, £100,000 and £80,000. At the end of the five years, the project assets will be sold for £100,000. The payback period for the project is three years. What is the original cost of the investment in this project?

a. £180,000

Heading reference: Payback

b. £200,000

Heading reference: Payback

c. £300,000

Heading reference: Payback

d. £420,000

Heading reference: Payback

Type: true-false

Title: Chapter 16 Question 43

43) The average annual accounting profit generated by a project x the accounting rate of return of that project = the average capital employed by that project.

a. True

Heading reference: Accounting rate of return

b. False

Heading reference: Accounting rate of return

Type: multiple choice question

Title: Chapter 16 Question 44

44) JVG Limited is planning a new project. The project will generate accounting profits of £380,000 over its five year life. The accounting rate of return of this project is 16%. What is the average capital employed by this project?

a. £12,160

Heading reference: Accounting rate of return

b. £60,800

Heading reference: Accounting rate of return

c. £475,000

Heading reference: Accounting rate of return

d. £2,375,000

Heading reference: Accounting rate of return

Type: multiple choice question

Title: Chapter 16 Question 45

45) A project has an accounting rate of return of 20%. The assets used in the project have an original cost of £500,000 and an expected resale value of £50,000 when the project comes to an end in 5 years’ time. What are the total cash inflows expected from this project?

a. £275,000

Heading reference: Accounting rate of return

b. £675,000

Heading reference: Accounting rate of return

c. £700,000

Heading reference: Accounting rate of return

d. £725,000

Heading reference: Accounting rate of return