Chapter 16 Self-test questions

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. JDM Limited is planning to invest £600,000 in a new project. The project will last for four years. Depreciation on project assets is provided on the straight-line basis over the length of the project. Net cash inflows from the project in years 1 to 4 are expected to be £180,000, £200,000, £225,000 and £195,000. It is anticipated that the project assets will be sold for £120,000 at the end of year 4. What is the accounting rate of return for this project?

11.11% correct incorrect

22.22% correct incorrect

30.56% correct incorrect

33.33% correct incorrect

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. Which of the following will be estimated during the capital investment appraisal process? Please select all that apply.

The cost of the proposed investment. correct incorrect

Demand for the new product or service supplied as a result of the new project. correct incorrect

Cash inflows from the new project. correct incorrect

The cost of capital of the investing entity. correct incorrect

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. The _________ method of capital investment appraisal calculates the number of years it will take for the cash inflows from the project to return the original cost of the investment.

Your response

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. Capital investment appraisal = control

True correct incorrect

False correct incorrect

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. Which of the following statements describe short- term decision making and which describe capital investment?

Product costing

Long-term investment Short-term investment Long-term investment Long-term investment Short-term investment Short-term investment

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Generates profit and cash over several years

Long-term investment Long-term investment Short-term investment Short-term investment Long-term investment Short-term investment

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Improves the efficiency and profitability of operations

Long-term investment Short-term investment Short-term investment Long-term investment Short-term investment Long-term investment

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Contribution analysis

Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Short-term investment

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The key to survival

Long-term investment Short-term investment Long-term investment Long-term investment Short-term investment Short-term investment

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Maximizing returns for a period of a few months

Long-term investment Short-term investment Long-term investment Short-term investment Short-term investment Long-term investment

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. The directors of ABD Limited are considering a new investment proposal. The project will require an initial investment of £500,000 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 £125,000, £160,000, £215,000, £235,000 and £265,000. At the end of 5 years, the project will be discontinued and the project assets will be sold for an expected £160,000. ABD Limited has a required rate of return of 12%. What is the net present value of this proposal?

£41,905 correct incorrect

£85,135 correct incorrect

£175,919 correct incorrect

£282,689 correct incorrect

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. Discounted cash flows are an important capital investment appraisal technique because: Please select all that apply.

They recognize that money has a time value. correct incorrect

They recognize that money received today is more valuable than money received tomorrow. correct incorrect

They recognize that money received in the future is riskier and more uncertain. correct incorrect

They recognize that all units of money have the same value. correct incorrect

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. The internal rate of return is the discount rate at which the present value of the ___________ is equal to the present value of the cash outflows from the project.

Your response

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. When interest rates are 5%, the present value of £10,000 receivable in 6 years' time is £7,000.

True correct incorrect

False correct incorrect

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. Which of the following are advantages of the net present value capital investment appraisal technique? Please select all that apply.

Accounts for all the cash inflows and outflows from a project. correct incorrect

Discounts all cash inflows and outflows from a project into the common currency of today's money to enable fair comparisons between proposed projects to be made. correct incorrect

Determines the percentage discount rate at which the project breaks even in discounted cash flow terms. correct incorrect

Can be used in conjunction with the payback technique to determine when the discounted cash flows become positive. correct incorrect

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. XYZ Limited is investing £400,000 in a new project. The project will last for five years. At the end of the five years, the project assets will be sold for £100,000. 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 £85,000, £100,000, £115,000, £100,000 and £80,000. What is the payback period for this project?

The project does not have a payback period. correct incorrect

2 years 5 months correct incorrect

3 years 0 months correct incorrect

4 years 0 months correct incorrect

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

Calculate the total depreciation expected on the total investment in the proposed project. correct incorrect

Determine a discount rate at which the present value of the discounted cash flows is a negative figure. correct incorrect

Calculate the annual cash inflows expected from the proposed project. correct incorrect

Determine a discount rate at which the present value of the discounted cash flows is a positive figure. correct incorrect

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. Which of the following statements describe the disadvantages of the payback method of capital investment appraisal, which describe the disadvantages of the accounting rate of return method of capital investment appraisal and which describe the disadvantages of both the payback and the accounting rate of return methods of capital investment appraisal?

Ignores the total profits generated by an investment.

Both payback and the accounting rate of return Payback Accounting rate of return Accounting rate of return Accounting rate of return

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Ignores the time value of money.

Accounting rate of return Accounting rate of return Payback Accounting rate of return Both payback and the accounting rate of return

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Fails to differentiate between projects which generate the majority of their cash inflows in the early years of the project.

Accounting rate of return Payback Accounting rate of return Accounting rate of return Both payback and the accounting rate of return

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Ignores the magnitude of the projected cash inflows after the return of capital from the project.

Payback Accounting rate of return Accounting rate of return Both payback and the accounting rate of return Accounting rate of return

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Differentiates between projects on the basis of a percentage not on the basis of total cash inflows from a project.

Accounting rate of return Payback Accounting rate of return Accounting rate of return Both payback and the accounting rate of return

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. When interest rates are 8%, £10,000 today = £13,605 in four years' time.

True correct incorrect

False correct incorrect

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. TST Limited is planning a capital investment. Using a discount rate of 16%, the company has determined that its proposed investment project has a positive net present value of £18,229. Using a discount rate of 22%, the company has determined that its proposed investment project will have a negative net present value of £12,891. Given the results of these net present value calculations, what is the internal rate of return of the proposed investment project to two decimal places?

18.49% correct incorrect

19.51% correct incorrect

20.24% correct incorrect

26.24% correct incorrect