Deck 15: Investment Appraisal Techniques

Question 1

Shep Ltd is considering a possible four-year project. Details are as follows:
The accounting rate of return of this project will be:

A) 39.1%.
B) 11.9%.
C) 19.6%.
D) 23.9%.

Answer 1

D

Question 2

The cash flows associated with a project are as follows:
The payback period for the project is:

A) 3 years and 3 months.
B) 3 years and 4 months.
C) 4 years and 3 months.
D) 3 years.

Answer 2

B

Question 3

Which of the following is an advantage of using the payback period?

A) It ignores cash inflows after the payback point has been reached.
B) It ignores the actual timing of cash flows.
C) It is useful measure of the speed with which a project will pay back its initial costs.
D) It takes no account of the time value of money.

Answer 3

C

Question 4

A business can either receive £200 now or an agreed amount in two years' time. If the business requires a return of 12% on sums invested, what is the minimum amount the business should agree to receive in two years' time?

A) £224
B) £251
C) £159
D) £179

Question 5

If a 10% discount rate is used, what is the present value of the following two cash inflows?
£1,600 received in one year's time, plus
£2,000 received in two years' time.

A) £3,116
B) £2,988
C) £3,276
D) £3,148

Question 6

Alternative projects, M and N, have been evaluated and the following results found:
Which of the following is the most valid reason for choosing to undertake project N?

A) Project N has a longer payback period than project M
B) Project N will yield the highest accounting rate of return.
C) Project N will yield the highest NPV.
D) Project N will give rise to greater cash flows than project M.

Question 7

Jigger Ltd is considering two alternative projects; each of which will involve an initial outlay of £600,000. Both will have a four-year life and are expected to yield the following cash inflows:
Which of the following is not true?

A) Project X has a payback period of 3 years.
B) Project Y has a payback period of 2.5 years.
C) Project X will always yield a higher NPV than project Y.
D) Project Y will always yield a higher NPV than project X.

Question 8

Jigger Ltd is considering undertaking project X, which will involve an initial outlay of £600k. The project has the following cash inflows associated with it:
What is the NPV of project X if a 12% discount rate is used?

A) A positive NPV of £118k
B) A negative NPV of £118k
C) A positive NPV of £200k
D) A positive NPV of £718k

Question 9

Which of the following statements concerning the IRR is true?

A) The IRR does not take account of the time value of money.
B) The IRR does not take account of the all the project cash flows.
C) The IRR is the sum of the discounted cash flows of a project.
D) The IRR is the discount rate that, when applied to a project's cash flows, gives an NPV of zero.

Question 10

What does the accounting rate of return measure?

A) The total profits expected from the project, expressed as a percentage of the average annual investment in the project.
B) The total profits expected from the project, expressed as a percentage of the initial outlay.
C) The average annual expected profit expressed as a percentage of the average funds invested in it.
D) The average annual expected profit expressed as a percentage of the initial outlay.