Question 1

Which three of the following are drawbacks of payback?

Accepted Answer

A)  Cash flows beyond the payback cut- off are ignored. 
B)  The cut- off point is arbitrarily selected: it has no theoretical base. 
C)  It is difficult to calculate and interpret. 
D)  It fails to allow for the time value of money. 
A)  Cash flows beyond the payback cut- off are ignored. 
B)  The cut- off point is arbitrarily selected: it has no theoretical base. 
C)  It is difficult to calculate and interpret. 
D)  It fails to allow for the time value of money.

Question 2

Projects having higher cash inflows in the early years tend to be less sensitive to changes in the cost of capital and are therefore often acceptable at higher discount rates compared to projects with higher cash inflows that occur in the later years.

Accepted Answer

A) True 
 B)False

Question 3

For conventional projects, both NPV and IRR techniques will always generate the same accept- reject decision, but differences in their underlying assumptions can cause them to rank mutually exclusive projects differently.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements accurately relates to the topic of risk?

Accepted Answer

A)  The discount rate may be raised or lowered to allow for the risk of a project, the extent of the risk premium being based on indisputable theory. 
B)  Risk is unpredictable, and thus cannot be allowed for in project planning. 
C)  Risk can be quantified using objective probabilities that can be defined mathematically and inferred from historical data. 
D)  Risk is the probability of an outturn being less than anticipated. 
A)  The discount rate may be raised or lowered to allow for the risk of a project, the extent of the risk premium being based on indisputable theory. 
B)  Risk is unpredictable, and thus cannot be allowed for in project planning. 
C)  Risk can be quantified using objective probabilities that can be defined mathematically and inferred from historical data. 
D)  Risk is the probability of an outturn being less than anticipated.

Question 5

Which three of the following accurately relate to the accounting rate of return?

Accepted Answer

A)  It is the ratio of accounting profit to investment, expressed as a percentage. 
B)  It makes no allowance for the time value of money. 
C)  It is calculated and is required by managers because they are often judged retrospectively by this measure. 
D)  It is calculated more often than payback, NPV, or IRR during project appraisal by UK firms. 
A)  It is the ratio of accounting profit to investment, expressed as a percentage. 
B)  It makes no allowance for the time value of money. 
C)  It is calculated and is required by managers because they are often judged retrospectively by this measure. 
D)  It is calculated more often than payback, NPV, or IRR during project appraisal by UK firms.

Question 6

What term is used for the ratio of accounting profit to investment expressed as a percentage?

Accepted Answer

A)  Internal rate of return 
B)  Net rate of return 
C)  Accounting rate of return 
D)  Benefit- cost ratio 
A)  Internal rate of return 
B)  Net rate of return 
C)  Accounting rate of return 
D)  Benefit- cost ratio

Question 7

What are the three reasons why IRR is used more than NPV?

Accepted Answer

A)  It is thought (wrongly) to give a better ranking. 
B)  It results in more projects being accepted. 
C)  It can be calculated without cost of capital. 
D)  A psychological preference for a percentage 
A)  It is thought (wrongly) to give a better ranking. 
B)  It results in more projects being accepted. 
C)  It can be calculated without cost of capital. 
D)  A psychological preference for a percentage

Question 8

The cash flow for a project is as shown in the table. The discount rate is 8 per cent.   What is the payback and discounted payback of the project?

Accepted Answer

A)  Payback in 4 years and discounted payback in 2 years 
B)  Payback in 4 years and discounted payback in 3 years 
C)  Payback in 5 years and discounted payback in 4 years 
D)  Payback in 4 years and discounted payback in 5 years 
A)  Payback in 4 years and discounted payback in 2 years 
B)  Payback in 4 years and discounted payback in 3 years 
C)  Payback in 5 years and discounted payback in 4 years 
D)  Payback in 4 years and discounted payback in 5 years

Question 9

Which three of the following statements about using the accounting rate of return are true?

Accepted Answer

A)  Managers' performances are often judged using ARR. 
B)  Many managers have familiarity with it 
C)  It gives the most accurate predictions. 
D)  It is easy to understand 
A)  Managers' performances are often judged using ARR. 
B)  Many managers have familiarity with it 
C)  It gives the most accurate predictions. 
D)  It is easy to understand

Which three of the following are drawbacks of payback?

Projects having higher cash inflows in the early years tend to be less sensitive to changes in the cost of capital and are therefore often acceptable at higher discount rates compared to projects with higher cash inflows that occur in the later years.

For conventional projects, both NPV and IRR techniques will always generate the same accept- reject decision, but differences in their underlying assumptions can cause them to rank mutually exclusive projects differently.

Which of the following statements accurately relates to the topic of risk?

Which three of the following accurately relate to the accounting rate of return?

What term is used for the ratio of accounting profit to investment expressed as a percentage?

What are the three reasons why IRR is used more than NPV?

The cash flow for a project is as shown in the table. The discount rate is 8 per cent. What is the payback and discounted payback of the project?

Which three of the following statements about using the accounting rate of return are true?

The Financial World

Project Appraisal: Net Present Value and Internal Rate of Return

Project Appraisal: Cash Flow and Applications

Project Appraisal: Capital Rationing, Taxation and Inflation

Risk and Project Appraisal

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 4: The Decision-Making Process for Investment Appraisal

Which three of the following are drawbacks of payback?

Projects having higher cash inflows in the early years tend to be less sensitive to changes in the cost of capital and are therefore often acceptable at higher discount rates compared to projects with higher cash inflows that occur in the later years.

For conventional projects, both NPV and IRR techniques will always generate the same accept- reject decision, but differences in their underlying assumptions can cause them to rank mutually exclusive projects differently.

Which of the following statements accurately relates to the topic of risk?

Which three of the following accurately relate to the accounting rate of return?

What term is used for the ratio of accounting profit to investment expressed as a percentage?

What are the three reasons why IRR is used more than NPV?

The cash flow for a project is as shown in the table. The discount rate is 8 per cent. What is the payback and discounted payback of the project?

Which three of the following statements about using the accounting rate of return are true?

The Financial World

Project Appraisal: Net Present Value and Internal Rate of Return

Project Appraisal: Cash Flow and Applications

Project Appraisal: Capital Rationing, Taxation and Inflation

Risk and Project Appraisal

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