Question 1

Under the equivalent annual value method,the criterion for project acceptance is:

Accepted Answer

A)  the project with the higher equivalent annual value is preferred.
B)  the project with the lower equivalent annual value is preferred.
C)  the project with the shorter life is preferred.
D)  the project with the higher equivalent annual value is preferred,provided that both projects have the same cost of capital. D

Question 2

Decision-tree analysis takes into account the ________ of alternative events occurring and the effects those events have on the expected net present value of a project.

Accepted Answer

probability

Question 3

A method which involves calculating the annual cash flow of an annuity that has the same life as the project and whose present value equals the NPV of the project is:

Accepted Answer

A)  the chain of replacement method.
B)  the equivalent annual value method.
C)  the constant chain of replacement method.
D)  none of the given options. B

Question 4

Sensitivity analysis examines the effect of changing one or more ______________ to observe the effect on results.

Accepted Answer

The answer of Sensitivity analysis examines the effect of changing...

Question 5

Which of the following statements best describes the role of qualitative factors,such as company image,in the selection of projects?

Accepted Answer

A)  They are ignored because they are subjective.
B)  They are useful to decision-makers but management is unable to quantify them.
C)  They must be quantified in some manner before they can be of some use.
D)  They are only to be used when deciding between projects with identical net present values.

Question 6

Using the constant chain of replacement in perpetuity method,calculate the net present value of a project with the following cash flows: 
Assume the cost of capital is 10% p.a.

Accepted Answer

A)  $38,159
B)  $153,444
C)  $381,596
D)  $148,308

Question 7

Luxury Fleet operates a fleet of limousines.It is currently considering replacing them with a new model.It plans to evaluate options based on the following information: 
Which of the four following options should management choose?

Accepted Answer

A)  Replace the old limousines now with the standard limousines and operate for seven years,replaced in perpetuity.
B)  Replace the old limousines in three years' time with the standard limousines and operate for seven years,replaced in perpetuity.
C)  Replace the old limousines in three years' time with the deluxe limousines and operate for nine years,replaced in perpetuity.
D)  Replace the old limousines now with the deluxe limousines and operate for nine years,replaced in perpetuity.

Question 8

The break-even point can be defined as:

Accepted Answer

A)  that volume of sales whereby total revenues from a project are equal to total variable costs.
B)  that volume of sales whereby total revenues from a project are equal to total variable costs plus total fixed and investment costs.
C)  that volume of sales whereby the present value of revenues from a project are equal to the summation of present values of total variable and fixed costs and the initial outlay.
D)  that volume of sales whereby the present value of revenues from a project are equal to the summation of present values of total variable costs.

Question 9

A project's residual value is the:

Accepted Answer

A)  disposal value of the project's assets less any dismantling and removal costs associated with the project's termination.
B)  disposal value of the project's assets less the initial outlay.
C)  disposal value of the project's assets less the project's working capital.
D)  disposal value of the project's assets.

Question 10

Head office costs should be included in a net present value analysis.

Accepted Answer

A) True 
 B)False

Question 11

Break-even analysis is used in situations when:

Accepted Answer

A)  the decision-maker is a non-profit organisation.
B)  the decision-maker is concerned with questions such as 'What will be the net present value if sales are 20% lower than expected?'
C)  the project under consideration is an item that does not generate positive cash flows.
D)  the decision-maker is concerned with questions such as 'How low can sales go before the project starts losing money?'

Question 12

Which of the following methods should be applied when comparing independent projects with different lives?

Accepted Answer

A)  The constant chain of replacement method only.
B)  Either the constant chain of replacement method or the equivalent annual value method only.
C)  The constant chain of replacement method using the real cost of capital only.
D)  The net present value method is adequate.

Question 13

A manager is considering investing in a new machine that costs $2.5 million.He identifies four uncertain variables: sales,fixed costs,advertising costs and the life of the new machine.The required rate of return is 15% p.a.Given the following information,determine which variable is most sensitive to changes or errors:

Accepted Answer

A)  Sales.
B)  Fixed costs.
C)  Advertising costs.
D)  Life of machine.

Question 14

Sunk costs can be defined as:

Accepted Answer

A)  incremental costs.
B)  opportunity costs.
C)  cost that has already been incurred but is relevant to future decision making.
D)  cost that has already been incurred and is irrelevant to future decision making.

Question 15

Residual value is:

Accepted Answer

A)  past outlay of a project that has no bearing on future costs or benefits.
B)  the portion of initial capital outlay that will be recovered.
C)  past outlay,which should not influence the decision between continuing and terminating a project.
D)  cost associated with exploration.

Question 16

Equivalent annual value can be shown as:

Accepted Answer

A)   
B)   
C)   
D)  none of the given options.

Question 17

Which of the following statements is false?

Accepted Answer

A)  The rejection of positive net present value projects by management is inconsistent with the objective of maximising shareholder wealth even if the reason for rejection is due to internal capital rationing.
B)  Management may select a project with a lower net present value because qualitative factors may render the other project less attractive.
C)  The equivalent annual value of a project is equal to the net present value of a project held in perpetuity,divided by the required rate of return.
D)  None of the given options

Question 18

A major flaw of simulation analysis is that it fails to consider the possibility that risk may be removed through diversification.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following costs should be excluded from incremental cash flows?

Accepted Answer

A)  The wage costs related to producing the new product.
B)  The cost of establishing a new plant.
C)  The consultant's fee for the feasibility study of the project.
D)  The plant operating costs.

Question 20

Which of the following statements best describes simulation analysis?

Accepted Answer

A)  Simulation analysis involves changing one variable at a time.
B)  Simulation analysis involves changing all relevant variables at the one time.
C)  Simulation analysis requires examination of cash flows under alternate values for the cost of capital.
D)  Simulation analysis involves determining the level of sales or output that determines the break-even point.

Exam 6: The Application of Project Evaluation Methods

Under the equivalent annual value method,the criterion for project acceptance is:

Decision-tree analysis takes into account the ________ of alternative events occurring and the effects those events have on the expected net present value of a project.

A method which involves calculating the annual cash flow of an annuity that has the same life as the project and whose present value equals the NPV of the project is:

Sensitivity analysis examines the effect of changing one or more ______________ to observe the effect on results.

Which of the following statements best describes the role of qualitative factors,such as company image,in the selection of projects?

Using the constant chain of replacement in perpetuity method,calculate the net present value of a project with the following cash flows: Assume the cost of capital is 10% p.a.

Luxury Fleet operates a fleet of limousines.It is currently considering replacing them with a new model.It plans to evaluate options based on the following information: Which of the four following options should management choose?

The break-even point can be defined as:

A project's residual value is the:

Head office costs should be included in a net present value analysis.

Break-even analysis is used in situations when:

Which of the following methods should be applied when comparing independent projects with different lives?

Sunk costs can be defined as:

Residual value is:

Equivalent annual value can be shown as:

Which of the following statements is false?

A major flaw of simulation analysis is that it fails to consider the possibility that risk may be removed through diversification.

Which of the following costs should be excluded from incremental cash flows?

Which of the following statements best describes simulation analysis?