Question 1

Which of the following is correct?

Accepted Answer

A)   The internal rate of return (IRR)  is technically flawed and can lead to incorrect decisions
B)   The internal rate of return (IRR)  involves less calculations than other investment appraisal methods
C)   The internal rate of return (IRR)  can deal with mutually exclusive projects
D)   The internal rate of return (IRR)  can distinguish between projects involving investment from those requiring borrowingE) A) and D)
F) B) and D)

Question 2

Which of the following is correct?

Accepted Answer

A)   The costs associated with feasibility studies should not be included in an investment appraisal
B)   The cash flows from fixed overheads are usually excluded from an investment appraisal
C)   HM Revenue and Customs allows profits to be reduced for tax purposes through capital allowances for depreciation
D)   All of the above statements are correctE) B) and D)
F) None of the above

Question 3

Which of the following approaches could be used in assessing different projects with different degrees of risk?

Accepted Answer

A)   Use lower discount rates for risky projects
B)   Use higher discount rates for risky projects
C)   Use IRR - as this will ensure risk is taken into account
D)   Always take the less risky projectE) None of the above
F) B) and C)

Question 4

A company is evaluating an investment in a piece of machinery.The machine costs £10,000 and is expected to generate cash flows of £3,000 in year 1,£4,300 in year 2 and £5,800 in year 3.The discount rate is 10% and the relevant discount factors are:
  Year 1 0.909 Year 2 0.826 Year 3 0.751\begin{array} { c c } 	ext { Year 1 } & 0.909 \	ext { Year 2 } & 0.826 \	ext { Year 3 } & 0.751\end{array} Year 1  Year 2  Year 3 ​0.9090.8260.751​ 
Calculate the NPV

Accepted Answer

A)   £13,100
B)   £10,634.60
C)   £634.60
D)   £0 E) A) and D)
F) None of the above

Question 5

When considering which values to use in Investment Appraisal,only "Relevant Costs" are used.
A company has identified the following costs involved in a project:
(i) Project Manager salary £30,000.The Project Manager is currently an accountant paid £28,000 - when the project starts,a new accountant will be employed at a cost of £20,000.
(ii) The Project Office will be located in a current office; rent is £3,000.
(iii) The additional income is expected to be £400,000 before tax,which is payable at 30%
The Relevant Costs are:

Accepted Answer

A)   £30,000 salary, £3,000 rent, £400,000 income
B)   £22,000 salary, nil rent, £280,000 income
C)   £30,000 salary, £3,000 rent, £280,000 income
D)   £30,000 salary, nil rent, £280,000 incomeE) B) and C)
F) A) and D) B

Question 6

Annual cash flows from a project are usually lower than the annual profits,because depreciation is not paid in cash

Accepted Answer

A) True 
 B)False

Question 7

A company with a 12% cost of capital will consider pursuing a project which yields a 10% return per annum because it will increase the value of the company

Accepted Answer

A) True 
 B)False

Question 8

The net present value (NPV) decision rule is:

Accepted Answer

A)   Accept the project if the NPV is 
B)   Reject the project if the NPV is > 0
C)   Accept the project if the NPV is > 0
D)   Accept the project if the NPV = 0E) All of the above
F) A) and D)

Question 9

The accounting rate of return (ARR)calculation uses accounting profits as opposed to cash flows

Accepted Answer

A) True 
 B)False

Question 10

The difference between "Risk" and "Uncertainty" is:

Accepted Answer

A)   "Risk" is quantifiable and can be estimated, with the use of probability. "Uncertainty" is unknown
B)   "Risk" always exists. No investment can be "risk-free". But there are things that can be "certain"
C)   There is no difference. The terms are interchangeable
D)   "Risk" cannot be measured. "Certainty" can be estimated with the use of probabilityE) A) and B)
F) C) and D)

Question 11

Which of the following is not used as an investment appraisal technique?

Accepted Answer

A)   IRR
B)   ARR
C)   NPV
D)   Capital gearingE) All of the above
F) A) and C)

Question 12

ROI stands for:

Accepted Answer

A)   Residual or Other Income
B)   Return On Investment
C)   Revenue Over Investment
D)   Revenue Only IncomeE) None of the above
F) B) and C)

Question 13

ARR is expressed as:

Accepted Answer

A)    Total annual profit  Total invested\frac {	ext {  Total annual profit }} { 	ext { Total invested} } Total invested Total annual profit ​   ×100 	imes 100×100   
B)    Average annual profit Amount initially invested \frac {	ext { Average annual profit  }} { 	ext {Amount initially invested } }Amount initially invested  Average annual profit ​   ×100 	imes 100×100  
C)    Amount initially invested  Average annual profit\frac {	ext {  Amount initially invested }} { 	ext { Average annual profit} } Average annual profit Amount initially invested ​   ×100 	imes 100×100  
D)    IRRAmount initially invested \frac {	ext {  IRR}} { 	ext {Amount initially invested } }Amount initially invested  IRR​×100 	imes 100×100   E) All of the above
F) None of the above B

Question 14

Which of the following statements is correct?

Accepted Answer

A)   Payback is complex to calculate
B)   Payback gives a better indication of return than NPV
C)   The longer the payback period the less risk associated with the project
D)   The shorter the payback period the less risk associated with the projectE) A) and C)
F) B) and D)

Question 15

A project with a high IRR might have a lower NPV

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is correct?

Accepted Answer

A)   There is no clear relationship between ROCE and cost of capital to be used for discounted cash flow (DCF) 
B)   The P/E ratio is a good indication of investors expectations and can be easily converted into a cost of capital of capital figure
C)   If a companies dividend yield is high this means that shareholders expectations are high and future dividends are expected to grow
D)   All of the above are correctE) A) and D)
F) B) and D)

Question 17

Which of the following is correct?

Accepted Answer

A)   Payback is based on profit as opposed to cash flow
B)   Payback is based on cash flow as opposed to profit
C)   Payback shows the internal rate of return (IRR)  of the project
D)   None of the above statements are correctE) B) and C)
F) None of the above

Question 18

Which of the following would be a reason for preferring £100 now as opposed to £100 in 1 years time?

Accepted Answer

A)   Risk
B)   Interest lost
C)   Inflation
D)   All of the aboveE) C) and D)
F) All of the above

Question 19

In order to convert a future cash flow into a present value,you need to:

Accepted Answer

A)   Divide by a discount factor
B)   Divide by the current investment rate
C)   Multiply by a discount factor
D)   Multiply by the current investment rateE) B) and D)
F) B) and C)

Question 20

Which of the following statements is correct?

Accepted Answer

A)   ARR includes the timing of cash flows and profits
B)   ARR addresses the problems associated with the assumptions in profit measurement
C)   ARR does not use profit figures
D)   ARR can be calculated in a number of different waysE) B) and C)
F) None of the above D

Exam 14: Investment Appraisal

Which of the following is correct?

Correct Answer
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Which of the following is correct?

Correct Answer
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Which of the following approaches could be used in assessing different projects with different degrees of risk?

Correct Answer
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Correct Answer
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Correct Answer
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B

Annual cash flows from a project are usually lower than the annual profits,because depreciation is not paid in cash

Correct Answer
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A company with a 12% cost of capital will consider pursuing a project which yields a 10% return per annum because it will increase the value of the company

Correct Answer
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The net present value (NPV) decision rule is:

Correct Answer
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The accounting rate of return (ARR)calculation uses accounting profits as opposed to cash flows

Correct Answer
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The difference between "Risk" and "Uncertainty" is:

Correct Answer
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Which of the following is not used as an investment appraisal technique?

Correct Answer
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ROI stands for:

Correct Answer
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ARR is expressed as:

Correct Answer
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B

Which of the following statements is correct?

Correct Answer
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A project with a high IRR might have a lower NPV

Correct Answer
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Which of the following statements is correct?

Correct Answer
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Which of the following is correct?

Correct Answer
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Which of the following would be a reason for preferring £100 now as opposed to £100 in 1 years time?

Correct Answer
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In order to convert a future cash flow into a present value,you need to:

Correct Answer
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Which of the following statements is correct?

Correct Answer
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D

Exam 14: Investment Appraisal

Which of the following is correct?

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

Which of the following approaches could be used in assessing different projects with different degrees of risk?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

Annual cash flows from a project are usually lower than the annual profits,because depreciation is not paid in cash

Correct AnswerverifiedShow Answer

A company with a 12% cost of capital will consider pursuing a project which yields a 10% return per annum because it will increase the value of the company

Correct AnswerverifiedShow Answer

The net present value (NPV) decision rule is:

Correct AnswerverifiedShow Answer

The accounting rate of return (ARR)calculation uses accounting profits as opposed to cash flows

Correct AnswerverifiedShow Answer

The difference between "Risk" and "Uncertainty" is:

Correct AnswerverifiedShow Answer

Which of the following is not used as an investment appraisal technique?

Correct AnswerverifiedShow Answer

ROI stands for:

Correct AnswerverifiedShow Answer

ARR is expressed as:

Correct AnswerverifiedB

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

A project with a high IRR might have a lower NPV

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

Which of the following would be a reason for preferring £100 now as opposed to £100 in 1 years time?

Correct AnswerverifiedShow Answer

In order to convert a future cash flow into a present value,you need to:

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedD

Correct Answer
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Correct Answer
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Correct Answer
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B

Correct Answer
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Correct Answer
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Correct Answer
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B

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D