Question 1

Which technique considers a project's NPV under alternative assumed values of variables, changed one at a time?

Accepted Answer

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

Question 2

A sensitivity graph shows % deviation of the variable from expectation on the x- axis and NPV on the y- axis. Variables may be represented by straight lines on the graph. Which variable will have the largest negative effect on NPV?

Accepted Answer

A)  Large upward gradient 
B)  Small downward gradient 
C)  Large downward gradient 
D)  Small upward gradient 
A)  Large upward gradient 
B)  Small downward gradient 
C)  Large downward gradient 
D)  Small upward gradient

Question 3

Which three of the following statements correctly relate to subjective probability?

Accepted Answer

A)  Decision making based on subjective probabilities will be subject to some margin of error. 
B)  Subjective probabilities typically involve personal judgment of the range of outcomes along with the likelihood of their occurrence. 
C)  They are useful where there are no past records to help in the creation of the distribution of probabilities profile. 
D)  Decisions based on subjective probabilities are always more reliable than those based on objective, purely numerical, information. 
A)  Decision making based on subjective probabilities will be subject to some margin of error. 
B)  Subjective probabilities typically involve personal judgment of the range of outcomes along with the likelihood of their occurrence. 
C)  They are useful where there are no past records to help in the creation of the distribution of probabilities profile. 
D)  Decisions based on subjective probabilities are always more reliable than those based on objective, purely numerical, information.

Question 4

What would be the NPV of NewProduct if the discount rate was changed from 15 per cent to 18 per cent?

Accepted Answer

A)  £73,570 
B)  £23,750 
C)  - £23,750 
D)  £43,850 
A)  £73,570 
B)  £23,750 
C)  - £23,750 
D)  £43,850

Question 5

Which three of the following are difficulties of real option analysis?

Accepted Answer

A)  The inevitably short lifetime of the option 
B)  The difficulties of measuring uncertainty 
C)  The risk of over optimism 
D)  The complexity of the valuation process 
A)  The inevitably short lifetime of the option 
B)  The difficulties of measuring uncertainty 
C)  The risk of over optimism 
D)  The complexity of the valuation process

Question 6

If NewProduct prices could be increased by 10 per cent, while keeping sales levels at the original level, what would be the NPV?

Accepted Answer

A)  £71,075 
B)  £141.750 
C)  £101,750 
D)  £431,075 
A)  £71,075 
B)  £141.750 
C)  £101,750 
D)  £431,075

Question 7

The expected return of Project Y is at least equal to the expected return of Project X, and the variance of Y is less than that of X. Using the mean variance rule, what would you do?

Accepted Answer

A)  Reject both projects 
B)  Accept both projects 
C)  Prefer Project X 
D)  Prefer Project Y 
A)  Reject both projects 
B)  Accept both projects 
C)  Prefer Project X 
D)  Prefer Project Y

Question 8

A concert promoter assesses that the probability of a concert being a success is 0.4. The initial cash cost to take out an option to organise the concert 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. The promoter can make a final decision at a later date before making any further payments. What is the expected NPV, using an options approach?

Accepted Answer

A)  £50,000 
B)  £14,000 
C)  £10,000 
D)  - £10,000 
A)  £50,000 
B)  £14,000 
C)  £10,000 
D)  - £10,000

Which technique considers a project's NPV under alternative assumed values of variables, changed one at a time?

A sensitivity graph shows % deviation of the variable from expectation on the x- axis and NPV on the y- axis. Variables may be represented by straight lines on the graph. Which variable will have the largest negative effect on NPV?

Which three of the following statements correctly relate to subjective probability?

What would be the NPV of NewProduct if the discount rate was changed from 15 per cent to 18 per cent?

Which three of the following are difficulties of real option analysis?

If NewProduct prices could be increased by 10 per cent, while keeping sales levels at the original level, what would be the NPV?

The expected return of Project Y is at least equal to the expected return of Project X, and the variance of Y is less than that of X. Using the mean variance rule, what would you do?

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

Filters

Exam 6: Risk and Project Appraisal

Which technique considers a project's NPV under alternative assumed values of variables, changed one at a time?

A sensitivity graph shows % deviation of the variable from expectation on the x- axis and NPV on the y- axis. Variables may be represented by straight lines on the graph. Which variable will have the largest negative effect on NPV?

Which three of the following statements correctly relate to subjective probability?

What would be the NPV of NewProduct if the discount rate was changed from 15 per cent to 18 per cent?

Which three of the following are difficulties of real option analysis?

If NewProduct prices could be increased by 10 per cent, while keeping sales levels at the original level, what would be the NPV?

The expected return of Project Y is at least equal to the expected return of Project X, and the variance of Y is less than that of X. Using the mean variance rule, what would you do?

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

Filters