Deck 12: Capital Investment Appraisal

Question 1

Which of the following statements describe capital investment? Please select all that apply.

A) Long-term investment.
B) Used to fund day to day operations.
C) Generates profit and cash flows over several years.
D) Money spent now to benefit the future.

Answer 1

A,C,D

Question 2

Costing and capital investment both aim to maximize returns for a business.

Answer 2

True

Question 3

Capital investment = the acquisition of short-term assets.

Answer 3

False

Question 4

Which one of the following statements does not describe the function of capital investment appraisal?

A) Capital investment appraisal is concerned with maximizing shareholder value over the short term.
B) Capital investment appraisal is used to determine the most profitable investments available to an entity.
C) Capital investment appraisal is a control mechanism to enable entities to distinguish between projects competing for scarce capital resources.
D) Capital investment appraisal is used to determine whether investments in new projects and new non-current assets will represent valuable returns for an entity or not.

Question 5

Capital investment appraisal takes into account opportunity cost.

Question 6

Why do organizations undertake capital investment appraisal? Please select all that apply.

A) To determine whether proposed projects will make a valuable addition to current operations.
B) To enable all proposed projects to be undertaken.
C) To decide whether proposed projects will generate a positive return for shareholders.
D) To assess whether proposed projects will meet the organization's required rate of return on capital invested.

Question 7

Which of the following is a characteristic of the payback method of capital investment appraisal but not a characteristic of the accounting rate of return?

A) A measure based on a percentage return rather than a measure based on total cash inflows - total cash outflows.
B) A relative rather than an absolute measure.
C) Ignores the time value of money.
D) Distinguishes between projects with higher and lower initial net cash inflows.

Question 8

Which one of the following statements does not describe the net present value method of capital investment appraisal?

A) The net present value of the net cash inflows - the net present value of the cost of an investment = the net present value of the project.
B) Uses a discount rate to calculate the point at which the discounted present value of the net cash inflows = the net present value of the investment in the project.
C) Discounts net cash inflows that arise later in a project's life at a higher discount rate to recognize the increased risk attached to cash received further in the future.
D) The results of this investment appraisal technique are truly comparable as all of a project's net cash inflows are presented in units of common currency i.e. in units of current spending power.

Question 9

Which of the following statements do not describe the payback method of capital investment appraisal? Please select all that apply.

A) Calculates the number of years over which the original cost of the investment will be repaid.
B) Does not ignore the cash flows after the payback period is complete.
C) Does not ignore the time value of money.
D) Differentiates between projects that generate the majority of net cash inflows in the early stages of a project's life.

Question 10

Which of the following steps are involved in the calculation of the accounting rate of return of a proposed project? Please select all that apply.

A) Calculate the total cash inflows expected from the proposed project.
B) Calculate total depreciation expected on the total investment in the proposed project.
C) Calculate the discount rate at which the total cash inflows from the proposed project equal the total cash outflows from the proposed project.
D) Calculate the average capital employed over the life of the proposed project.

Question 11

Which one of the following would not be a step in the payback method of capital investment appraisal?

A) Determining the cash outflows associated with the proposed investment project.
B) Determining the cash inflows associated with the proposed investment project.
C) Determining the depreciation on the investment in the proposed investment project.
D) Ranking the projects according to the length of time taken to repay the initial investment in each proposed investment project.

Question 12

As the discount rate applied to the cash flows from a proposed investment project decreases, the net present value of those cash flows rises.

Question 13

BTB Limited is investing £400,000 into a new project. The project will last for four years. At the end of the four years, the project assets will be sold for £100,000. Depreciation on project assets is provided on the straight line basis over four years. The net cash inflows from the project in years 1 to 4 are expected to be £150,000 per annum. What is the payback period for this project?

A) This project does not have a payback period.
B) 2 years 0 months
C) 2 years 8 months
D) 4 years 0 months

Question 14

VCV Limited is investing £500,000 into a new project. The project will last for five years. At the end of the five years, the project assets will be sold for £200,000. Depreciation on project assets is provided on the straight line basis over five years. The net cash inflows from the project in years 1 to 5 are expected to be £50,000, £100,000, £150,000, £200,000 and £250,000. What is the payback period for this project?

A) This project does not have a payback period.
B) 2 years 4 months
C) 3 years 0 months
D) 4 years 0 months

Question 15

BGG Limited is investing £700,000 into a new project today. The project will last for five years. A further investment into the project of £100,000 will be made at the end of year 3 of the project's life. At the end of the five years, all the project assets will be sold for £200,000. Depreciation on project assets is provided on the straight line basis over five years. The net cash inflows from the project in years 1 to 5 are expected to be £200,000, £220,000, £240,000, £280,000 and £260,000. What is the payback period for this project?

A) 1 year 0 months
B) 2 years 4 months
C) 2 years 9 months
D) 3 years 6 months

Question 16

BDS Limited is planning to invest in a new project. The project will last for four years. Depreciation on project assets is provided on the straight line basis over the period of the project and depreciation of £560,000 will be charged on the project assets over the four years. £560,000 represents 70% of the cash outlay on non-current assets for the project. Net cash inflows from the project in years 1 to 4 are expected to be £190,000, £240,000, £260,000 and £264,000. It is anticipated that the project assets will be sold for their carrying amount at the end of year 4. What is the payback period for this project to the nearest month?

A) 1 year 10 months
B) 2 years 6 months
C) 3 years 5 months
D) 4 years 0 months

Question 17

TGV Limited is planning to invest in a new project. The project will last for five years. Depreciation on project assets is provided on the reducing balance basis over the life of the project. Depreciation will be charged at the rate of 40% per annum and the carrying amount of the assets used in the project at the end of 5 years will be £69,984. Net cash inflows from the project in years 1 to 5 are expected to be £215,000, £255,000, £270,000, £240,000 and £200,000. It is anticipated that the project assets will be sold for their carrying amount at the end of year 5. What is the payback period for this project to the nearest month?

A) This project does not have a payback period.
B) 4 months
C) 2 years 3 months
D) 3 years 8 months

Question 18

Mason Limited is evaluating a proposed capital investment project. The initial investment will be £900,000. The initial investment will have a residual value of £100,000 when the project comes to an end in 5 years' time. Net cash inflows from the project will be £200,000 in year 1, £300,000 in year 2, £400,000 in year 3, £350,000 in year 4 and £250,000 in year 5. What is the accounting rate of return of this project?

A) 28%
B) 35%
C) 60%
D) 75%

Question 19

VCV Limited is investing £500,000 into a new project. The project will last for five years. At the end of the five years, the project assets will be sold for £200,000. Depreciation on project assets is provided on the straight line basis over five years. The expected net cash inflows from the project in years 1 to 5 are expected to be £50,000, £100,000, £150,000, £200,000 and £250,000. What is the accounting rate of return for this project?

A) 25.71%
B) 36.00%
C) 42.86%
D) 60.00%

Question 20

BGV Limited is investing £700,000 into a new project today. The project will last for five years. At the end of the five years, the project assets will have a £nil resale value and will be scrapped at a cost of £60,000. Depreciation on project assets is provided on the straight line basis over five years. The expected net cash inflows from the project in years 1 to 5 are expected to be £200,000, £220,000, £240,000, £180,000 and £160,000. What is the accounting rate of return for this project?

A) 12.63%
B) 13.71%
C) 15.79%
D) 17.14%

Question 21

BDS Limited is planning to invest in a new project. The project will last for four years. Depreciation on project assets is provided on the straight line basis over the period of the project and depreciation of £480,000 will be charged on the project assets over the four years. £480,000 represents 60% of the cash outlay on non-current assets for the project. Net cash inflows from the project in years 1 to 4 are expected to be £200,000, £240,000, £265,000 and £225,000. It is anticipated that the project assets will be sold for their carrying amount at the end of year 4. What is the accounting rate of return for this project?

A) 5.80%
B) 17.58%
C) 20.09%
D) 27.23%

Question 22

BFT Limited is planning to invest in a new project. The project will last for four years and cost £800,000. Depreciation on project assets is provided on the reducing balance basis at the rate of 25% over the life of the project. Net cash inflows from the project in years 1 to 4 are expected to be £225,000, £250,000, £275,000 and £210,000. It is anticipated that the project assets will be sold for their carrying amount at the end of year 4. What is the accounting rate of return for this project?

A) 9.81%
B) 10.00%
C) 12.48%
D) 19.61%

Question 23

The directors of PDD Limited are considering an investment in a new project. The project will cost £800,000 and will have a resale value at the end of 4 years of £200,000. Net cash inflows are expected to be £300,000 in year 1, £250,000 in year 2, £400,000 in year 3 and £50,000 in year 4. PDD Limited has a required rate of return of 12%. What is the net present value of this project?

A) Negative net present value of - £16,335
B) Positive net present value of £110,765
C) Positive net present value of £183,665
D) Positive net present value of £310,765

Question 24

The directors of DPD Limited are considering a new investment proposal. The project will require an initial investment of £300,000 and a further investment at the end of year 3 of £150,000. Net cash inflows in years 1 to 5 are expected to be £75,000, £150,000, £225,000, £300,000 and £360,000. At the end of 5 years, the project will be discontinued and the project assets will be sold for an expected £100,000. DPD Limited has a required rate of return of 9%. What is the net present value of this proposal?

A) £365,289
B) £430,279
C) £464,449
D) £580,279

Question 25

VCV Limited is investing £500,000 into a new project. The project will last for five years. At the end of the five years, the company will have to pay £50,000 to scrap the project's assets. The net cash inflows from the project in years 1 to 5 are expected to be £50,000, £100,000, £150,000, £200,000 and £250,000. VCV Limited has a required rate of return of 11%. What is the net present value of this project?

A) Negative net present value of - £13,675
B) Positive net present value of + £16,000
C) Negative net present value of - £34,000
D) Positive net present value of + £45,675

Question 26

BGG Limited is investing £700,000 into a new project today. The project will last for five years. A further investment into the project of £100,000 will be made at the end of year 2 of the project's life. At the end of the five years, all the project assets will be sold for £200,000. Depreciation on project assets is provided on the straight line basis over five years. The net cash inflows from the project in years 1 to 5 are expected to be £200,000, £220,000, £240,000, £280,000 and £260,000. BGG's cost of capital is 15%. What is the net present value of this project?

A) Negative net present value of - £87,612
B) Positive net present value of + £11,828
C) Positive net present value of + £111,268
D) Positive net present value of + £186,878

Question 27

BVC Limited is investing £900,000 into a new project today. The project will last for five years. At the end of year 3 of the project's life, half of the assets will be sold for £200,000. At the end of the five years, the remaining project assets will be sold for £50,000. The net cash inflows from the project in years 1 to 5 are expected to be £180,000, £240,000, £280,000, £320,000 and £220,000. BVC's cost of capital is 9%. What is the net present value of this project?

A) Positive net present value of + £20,527
B) Positive net present value of + £85,517
C) Positive net present value of + £174,967
D) Positive net present value of + £239,957

Question 28

Dixon Limited has undertaken various capital investment appraisal calculations. Using a discount rate of 16%, the company has determined that its proposed investment project has a positive net present value of £100,000. Using a discount rate of 21%, the company has determined that its proposed investment project will have a negative net present value of £25,000. Given the above net present value calculations, what is the internal rate of return of the proposed investment project?

A) 17.00%
B) 17.25%
C) 20.00%
D) 22.25%

Question 29

The directors of TZA Limited are evaluating a new investment project which has a positive net present value of £4,000 when the project cash flows are discounted at a rate of 12%. When the investment project cash flows are discounted at the rate of 17%, the net present value of the project is - £2,000. What is the internal rate of return of the new investment project?

A) 13.67%
B) 14.50%
C) 15.33%
D) 17.00%

Question 30

VCV Limited is planning a capital investment. Using a discount rate of 11%, the company has determined that its proposed investment project has a negative net present value of - £13,675. Using a discount rate of 9%, the company has determined that its proposed investment project will have a positive net present value of £17,530. Given the above net present value calculations, what is the internal rate of return of the proposed investment project to two decimal places?

A) 6.44%
B) 9.44%
C) 9.88%
D) 10.12%

Question 31

VKU Limited is planning a capital investment. Using a discount rate of 15%, the company has determined that its proposed investment project has a positive net present value of + £15,280. Using a discount rate of 19%, the company has determined that its proposed investment project will have a negative net present value of £3,660. Given the above net present value calculations, what is the internal rate of return of the proposed investment project to two decimal places?

A) 15.77%
B) 15.96%
C) 18.23%
D) 19.96%

Question 32

XTA Limited is planning a capital investment. Using a discount rate of 14%, the company has determined that its proposed investment project has a negative net present value of - £2,530. Using a discount rate of 10%, the company has determined that its proposed investment project will have a positive net present value of £22,468. Given the above net present value calculations, what is the internal rate of return of the proposed investment project to two decimal places?

A) 9.55%
B) 10.40%
C) 13.55%
D) 13.60%

Question 33

Which one of the following is a limitation of the payback technique of capital investment appraisal?

A) It is simple and easy to calculate.
B) Considers the time value of money.
C) It is based on accounting profits.
D) Fails to take into account the magnitude of net cash inflows after the initial investment cost has been recovered.

Question 34

Which one of the following is not a limitation of the internal rate of return investment appraisal technique?

A) The technique assumes that the cash inflows and outflows arising from an investment project can be predicted accurately.
B) The technique does not require organizations to specify a cost of capital in advance but allows users to determine whether the rate of return is acceptable or not.
C) The technique cannot be applied in the evaluation of investment proposals which generate irregular cash flows.
D) The technique relies on the mathematical technique of interpolation which results in the internal rate of return being an estimate rather than an accurate figure.

Question 35

Which one of the following does not describe a limitation of the accounting rate of return method of capital investment appraisal?

A) It ignores the time value of money.
B) It is a percentage rather than an absolute value.
C) Fails to distinguish between projects that repay the majority of the initial investment in the early years of the project's life.
D) Cannot be used in situations where cash flows turn from being inflows to outflows and back again.

Question 36

Which one of the following is a disadvantage of the net present value method of capital investment appraisal?

A) Can be used in conjunction with the payback method of capital investment appraisal to determine when the discounted cash flows from a project pay back the original cost of the investment in that project.
B) Discounts all cash inflows and outflows associated with a project into a common currency.
C) Makes a large number of assumptions about cash flows and the cost of capital.
D) Cannot be used in situations where cash flows turn from being inflows to outflows and back again.

Question 37

Interest rates are 10%. What is the present value of £60,000 receivable in 6 years' time?

A) £30,789
B) £33,868
C) £37,255
D) £106,294

Question 38

£10,000 today = £13,108 in 4 years' time when interest rates stand at 7%.

Question 39

Money received tomorrow is just as valuable as money received today.

Question 40

Companies use their cost of capital to compensate for the risk they take on in investing in new projects and ventures.