Question 1

What term is used to describe the type of probability that involves a personal judgement of the likely range of outcomes and the likelihood of their occurrence?

Accepted Answer

A)  Subjective 
B)  Personal 
C)  Calculated 
D)  Objective 
A)  Subjective 
B)  Personal 
C)  Calculated 
D)  Objective A

Question 2

A concert promoter assesses that the probability of a concert being a success is 0.4. The initial cash cost will be £50,000. A success will create a present value of all cash flows of £250,000 and a flop will lose £100,000. What is the expected NPV, using a conventional approach?

Accepted Answer

A)  £10,000 
B)  £74,000 
C)  - £10,000 
D)  £0 
A)  £10,000 
B)  £74,000 
C)  - £10,000 
D)  £0 C

Question 3

Which two methods of allowing for project risk are most popular?

Accepted Answer

A)  Sensitivity analysis 
B)  Scenario analysis 
C)  Discount- rate analysis 
D)  Probability analysis 
A)  Sensitivity analysis 
B)  Scenario analysis 
C)  Discount- rate analysis 
D)  Probability analysis A, B

Question 4

What does the symbol µ represent in the formula: Z = X - µ ? a

Accepted Answer

A)  The deviation from the mean of the outcomes 
B)  The weighted mean of the possible outcomes 
C)  The weighted mean of all outcomes 
D)  The mean of the possible outcomes 
A)  The deviation from the mean of the outcomes 
B)  The weighted mean of the possible outcomes 
C)  The weighted mean of all outcomes 
D)  The mean of the possible outcomes

Question 5

If NewProduct sales are 5 per cent below the expected levels, cash flow per unit falls by 33.3 per cent. What will be the NPV?

Accepted Answer

A)  - £114,500 
B)  £14,500 
C)  - £154,500 
D)  £145,000 
A)  - £114,500 
B)  £14,500 
C)  - £154,500 
D)  £145,000

Question 6

A firm knows that it will go bankrupt if it loses more than £10m on a project. The expected NPV is £16m, with a standard deviation of £13m. What is the Z- factor of the bankruptcy event?

Accepted Answer

A)  +2 
B)  +7.5 
C)  - 2 
D)  - 0.31 
A)  +2 
B)  +7.5 
C)  - 2 
D)  - 0.31

Question 7

Which technique considers a project's NPV when a number of variables have been changed simultaneously?

Accepted Answer

A)  Scenario analysis 
B)  Probability analysis 
C)  Discount- rate analysis 
D)  Sensitivity analysis 
A)  Scenario analysis 
B)  Probability analysis 
C)  Discount- rate analysis 
D)  Sensitivity analysis

Question 8

Which approach enables analysts to assess how sensitive NPV is to changes in component values?

Accepted Answer

A)  Probability analysis 
B)  If- What calculations 
C)  Sensitivity analysis 
D)  Discount cash flow calculations 
A)  Probability analysis 
B)  If- What calculations 
C)  Sensitivity analysis 
D)  Discount cash flow calculations

Question 9

Which three types of information are most useful when a manager summarises the findings of a project appraisal?

Accepted Answer

A)  The likely outcomes of each project considered 
B)  Statement of to what extent probabilities were objective or subjective 
C)  Assessment of the probability of each outcome actually occurring 
D)  A clear focus on the most profitable outcome 
A)  The likely outcomes of each project considered 
B)  Statement of to what extent probabilities were objective or subjective 
C)  Assessment of the probability of each outcome actually occurring 
D)  A clear focus on the most profitable outcome

Question 10

Which of the following should a management team carry out to get a complete picture of a project?

Accepted Answer

A)  Sensitivity analysis and break- even NPV calculations 
B)  Sensitivity analysis, break- even NPV calculations and scenario analysis 
C)  Sensitivity analysis and scenario analysis 
D)  Break- even NPV calculations and scenario analysis 
A)  Sensitivity analysis and break- even NPV calculations 
B)  Sensitivity analysis, break- even NPV calculations and scenario analysis 
C)  Sensitivity analysis and scenario analysis 
D)  Break- even NPV calculations and scenario analysis

Question 11

Which of thefollowing types of analysis allows for most precision in judging project viability?

Accepted Answer

A)  Discount- rate analysis 
B)  Sensitivity analysis 
C)  Probability analysis 
D)  Scenario analysis 
A)  Discount- rate analysis 
B)  Sensitivity analysis 
C)  Probability analysis 
D)  Scenario analysis

Question 12

A project assessment shows a positive NPV even after allowing for real option value. Which one of the following options best describes what action management should take?

Accepted Answer

A)  Accept the project without further study 
B)  Reject the project and carry out further investigation of it 
C)  Reject the project 
D)  Accept the project and carry out further investigation 
A)  Accept the project without further study 
B)  Reject the project and carry out further investigation of it 
C)  Reject the project 
D)  Accept the project and carry out further investigation

Question 13

Which type of probability can be established mathematically or from historical data.

Accepted Answer

A)  Objective 
B)  Calculated 
C)  Subjective 
D)  Personal 
A)  Objective 
B)  Calculated 
C)  Subjective 
D)  Personal

Question 14

Which three of the following are drawbacks of the risk- adjusted discount rate method?

Accepted Answer

A)  Risk perception is inevitably susceptible to personal bias. 
B)  There is a high level of arbitrariness in the selection of risk premiums. 
C)  Investors tend to consider risk of less importance than project managers. 
D)  It is extremely difficult to allocate projects to risk classes. 
A)  Risk perception is inevitably susceptible to personal bias. 
B)  There is a high level of arbitrariness in the selection of risk premiums. 
C)  Investors tend to consider risk of less importance than project managers. 
D)  It is extremely difficult to allocate projects to risk classes.

Question 15

Which three statements accurately describe the process of allowing for risk by raising or lowering the discount rate?

Accepted Answer

A)  It is easy to understand. 
B)  It is an accurate, objective approach. 
C)  It is an easy approach to use. 
D)  It is susceptible to subjectivity in risk premium and risk class allocation. 
A)  It is easy to understand. 
B)  It is an accurate, objective approach. 
C)  It is an easy approach to use. 
D)  It is susceptible to subjectivity in risk premium and risk class allocation.

Question 16

Which three of the following statements accurately relate to scenario analysis?

Accepted Answer

A)  It is essentially a 'what- if' analysis in which a number of variables may be changed at the same time. 
B)  It uses a series of calculations to build up a picture of the nature of the risks facing the project and their impact on project profitability. 
C)  It is used by managers to analyse how projects have been affected by decisions made by their predecessors. 
D)  It can identify the extent to which variables may change allowing management to consider possible actions to be taken before a negative NPV is produced. 
A)  It is essentially a 'what- if' analysis in which a number of variables may be changed at the same time. 
B)  It uses a series of calculations to build up a picture of the nature of the risks facing the project and their impact on project profitability. 
C)  It is used by managers to analyse how projects have been affected by decisions made by their predecessors. 
D)  It can identify the extent to which variables may change allowing management to consider possible actions to be taken before a negative NPV is produced.

Question 17

Which value is calculated using the expression i=n
Σ (xipi) ?
I=1

Accepted Answer

A)  Expected return 
B)  Standard return 
C)  Discounted return 
D)  Total return 
A)  Expected return 
B)  Standard return 
C)  Discounted return 
D)  Total return

Question 18

Which two of the following best describe the real options approach?

Accepted Answer

A)  Managers are obliged to take certain actions in the future. 
B)  Managers are given the possibility to take an action in the future. 
C)  Managers are not obliged to take particular actions in the future. 
D)  Managers must refer potential changes to the original managers who made the decisions. 
A)  Managers are obliged to take certain actions in the future. 
B)  Managers are given the possibility to take an action in the future. 
C)  Managers are not obliged to take particular actions in the future. 
D)  Managers must refer potential changes to the original managers who made the decisions.

Question 19

NPV analysis on a new project has been carried out to identify the crude NPV and the NPV of the expansion option. Which other three types of analysis should be carried out?

Accepted Answer

A)  NPV of taking no action 
B)  NPV of the abandonment option 
C)  NPV of the timing option 
D)  NPV of other option possibilities 
A)  NPV of taking no action 
B)  NPV of the abandonment option 
C)  NPV of the timing option 
D)  NPV of other option possibilities

Question 20

Which two of the following conditions could mean that Project X will be preferred to Project Y, under the Mean- variance rule.

Accepted Answer

A)  The variance of X is equal to or less than that of Y. 
B)  The variance of X is less than that of Y. 
C)  The expected return of X is at least equal to the expected return of Y. 
D)  The expected return of X is less than that of Y. 
A)  The variance of X is equal to or less than that of Y. 
B)  The variance of X is less than that of Y. 
C)  The expected return of X is at least equal to the expected return of Y. 
D)  The expected return of X is less than that of Y.

Exam 6: Risk and Project Appraisal

What term is used to describe the type of probability that involves a personal judgement of the likely range of outcomes and the likelihood of their occurrence?

A concert promoter assesses that the probability of a concert being a success is 0.4. The initial cash cost will be £50,000. A success will create a present value of all cash flows of £250,000 and a flop will lose £100,000. What is the expected NPV, using a conventional approach?

Which two methods of allowing for project risk are most popular?

What does the symbol µ represent in the formula: Z = X - µ ? a

If NewProduct sales are 5 per cent below the expected levels, cash flow per unit falls by 33.3 per cent. What will be the NPV?

A firm knows that it will go bankrupt if it loses more than £10m on a project. The expected NPV is £16m, with a standard deviation of £13m. What is the Z- factor of the bankruptcy event?

Which technique considers a project's NPV when a number of variables have been changed simultaneously?

Which approach enables analysts to assess how sensitive NPV is to changes in component values?

Which three types of information are most useful when a manager summarises the findings of a project appraisal?

Which of the following should a management team carry out to get a complete picture of a project?

Which of thefollowing types of analysis allows for most precision in judging project viability?

A project assessment shows a positive NPV even after allowing for real option value. Which one of the following options best describes what action management should take?

Which type of probability can be established mathematically or from historical data.

Which three of the following are drawbacks of the risk- adjusted discount rate method?

Which three statements accurately describe the process of allowing for risk by raising or lowering the discount rate?

Which three of the following statements accurately relate to scenario analysis?

Which value is calculated using the expression i=n Σ (xipi) ? I=1

Which two of the following best describe the real options approach?

NPV analysis on a new project has been carried out to identify the crude NPV and the NPV of the expansion option. Which other three types of analysis should be carried out?

Which two of the following conditions could mean that Project X will be preferred to Project Y, under the Mean- variance rule.

The Financial World

Project Appraisal: Net Present Value and Internal Rate of Return

Project Appraisal: Cash Flow and Applications

The Decision-Making Process for Investment Appraisal

Project Appraisal: Capital Rationing, Taxation and Inflation

Portfolio Theory

The Capital Asset Pricing Model and Multi-Factor Models

Stock Markets

Raising Equity Capital

Long-Term Debt Finance

Short-Term and Medium-Term Finance

Stock Market Efficiency

Value-Based Management

Value-Creation Metrics

The Cost of Capital

Valuing Shares

Capital Structure

Dividend Policy

Mergers

Derivatives

Managing Exchange-Rate Risk

Future Value of 1 at Compound Interest

Present Value of 1 at Compound Interest

Present Value of an Annuity of 1 at Compound Interest

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