Question 1

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 ways 
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 ways D

Question 2

ARR is expressed as:

Accepted Answer

A) $\frac {\text {  Total annual profit }} { \text { Total invested} }$ $ \times 100$ 
B) $\frac {\text { Average annual profit  }} { \text {Amount initially invested } }$ $ \times 100$ 
C) $\frac {\text {  Amount initially invested }} { \text { Average annual profit} }$ $ \times 100$ 
D) $\frac {\text {  IRR}} { \text {Amount initially invested } }$$ \times 100$ 
A) $\frac {\text {  Total annual profit }} { \text { Total invested} }$ $ \times 100$ 
B) $\frac {\text { Average annual profit  }} { \text {Amount initially invested } }$ $ \times 100$ 
C) $\frac {\text {  Amount initially invested }} { \text { Average annual profit} }$ $ \times 100$ 
D) $\frac {\text {  IRR}} { \text {Amount initially invested } }$$ \times 100$ B

Question 3

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 income 
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 income B

Question 4

The net present value (NPV)decision rule is:

Accepted Answer

A)  Accept the project if the NPV is  0 
C)  Accept the project if the NPV is > 0 
D)  Accept the project if the NPV = 0 
A)  Accept the project if the NPV is  0 
C)  Accept the project if the NPV is > 0 
D)  Accept the project if the NPV = 0

Question 5

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 correct 
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 correct

Question 6

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 project 
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 project

Question 7

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

Question 8

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 project 
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 project

Question 9

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 correct 
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 correct

Question 10

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 11

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 rate 
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 rate

Question 12

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 probability 
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 probability

Question 13

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:
$$\begin{array} { c c } 
\text { Year 1 } & 0.909 \
\text { Year 2 } & 0.826 \
\text { Year 3 } & 0.751
\end{array}$$
Calculate the NPV

Accepted Answer

A)  £13,100 
B)  £10,634.60 
C)  £634.60 
D)  £0 
A)  £13,100 
B)  £10,634.60 
C)  £634.60 
D)  £0

Question 14

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 15

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 correct 
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 correct

Question 16

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 borrowing 
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 borrowing

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

A project with a high IRR might have a lower NPV

Accepted Answer

A) True 
 B)False

Question 19

ROI stands for:

Accepted Answer

A)  Residual or Other Income 
B)  Return On Investment 
C)  Revenue Over Investment 
D)  Revenue Only Income 
A)  Residual or Other Income 
B)  Return On Investment 
C)  Revenue Over Investment 
D)  Revenue Only Income

Question 20

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

Accepted Answer

A)  IRR 
B)  ARR 
C)  NPV 
D)  Capital gearing 
A)  IRR 
B)  ARR 
C)  NPV 
D)  Capital gearing

Which of the following statements is correct?

ARR is expressed as:

The net present value (NPV)decision rule is:

Which of the following statements is correct?

Which of the following statements is correct?

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

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

Which of the following is correct?

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

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

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

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

Which of the following is correct?

Which of the following is correct?

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

A project with a high IRR might have a lower NPV

ROI stands for:

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

The Statement of Financial Position Balance Sheetand What It Tells Us

The Income Statement Profit and Loss Account

The Development of Financial Reporting

Ratios and Interpretation: a Straightforward Introduction

How the Stock Market Assesses Company Performance

Cash Flow Statements: Understanding and Preparation

Advanced Interpretation of Company and Group Accounts

Current Issues in Financial Reporting

Bookkeeping to Trial Balance

Trial Balance to Final Accounts

Financing a Business

Management of Working Capital

Introduction to Management Accounting

Budgetary Planning and Control

Absorption Costing

Marginal Costing and Decision-Making

Standard Costing and Variance Analysis

Incomplete Records

Filters

Exam 14: Investment Appraisal

Which of the following statements is correct?

ARR is expressed as:

The net present value (NPV)decision rule is:

Which of the following statements is correct?

Which of the following statements is correct?

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

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

Which of the following is correct?

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

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

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

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

Which of the following is correct?

Which of the following is correct?

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

A project with a high IRR might have a lower NPV

ROI stands for:

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

The Statement of Financial Position Balance Sheetand What It Tells Us

The Income Statement Profit and Loss Account

The Development of Financial Reporting

Ratios and Interpretation: a Straightforward Introduction

How the Stock Market Assesses Company Performance

Cash Flow Statements: Understanding and Preparation

Advanced Interpretation of Company and Group Accounts

Current Issues in Financial Reporting

Bookkeeping to Trial Balance

Trial Balance to Final Accounts

Financing a Business

Management of Working Capital

Introduction to Management Accounting

Budgetary Planning and Control

Absorption Costing

Marginal Costing and Decision-Making

Standard Costing and Variance Analysis

Incomplete Records

Filters