SECTION B

Tick the correct answer

1 . Capital investment Appraisal refers to :

Making sure that assets pay for themselves as soon as possible
Evaluating the costs and benefits of proposed investments in operating assets
Making sure that we have enough money to buy assets
Making sure that we have enough assets to operate

2. Which of the following will not be a relevant factor when using the payback
method of capital investment appraisal?
The cost of the asset
The timing of the first cash inflow
The cash flows generated by the asset up to the payback period
The total cash flows generated by the asset

3. A project would normally be undertaken if its net present value is:

Negative
Exactly the same as the NPV of existing projects
Positive
Zero
 4. Why is the payback method often considered inferior to discounted cash
flow in capital investment appraisal?
I is more difficult to calculate
It does not calculate how long it will take to recoup the money invested
It does not take account of the time value of money
It only takes into account the future income of a project

5. Popps Ltd is considering a project with an initial investment of £120,000.

This project will generate the following cash flows:
£
Year 1 15,000
Year 2 25,000
Year 3 40,000
Year 4 40,000
Year 5 35,000
Year 6 30,000
Using a discount rate of 20% the discounted payback period would be:
The investment does not pay back
4 years
6 years
5 years

6. An asset initially costs £100,000. It is expected to last for 5 years and it will
be worthless at the end of this time. Depreciation is charged on a straight line
basis over the assets useful life. Given the following profits from the
investment what is its net present value assuming a discount rate of 10%?
£
Year 1 7,500
Year 2 12,500
Year 3 16,000
Year 4 14,000
Year 5 12,500
£162,479
£22,284
£(53,500)
£(37,509)

7. Which of the following statements is true?

Investments that have a positive net present value should always be

accepted
Investments that have a positive net present value should be considered for
acceptance
Investments that pay back in five years or less should always be accepted
Investments that yield a positive internal rate of return should be accepted

8. A project costs £29,000 and is expected to have a useful life of three years at
which point its scrap value will be £5,000. The project is expected to yield net
profits of £1,000 per annum over its useful life. Using the average book value
of the asset the accounting rate of return will be:
75%
 8%
6%
53%

9. A project has the following cash flows:

Year 0 £10,500 initial investment

Year 1 £4,486 cash inflow
Year 2 £3,915 cash inflow
Year 3 £3,206 cash inflow
Year 4 £2,677 cash inflow

What is the internal rate of return of this project?

17%
11%
15%
13%

10 A project that has been tested for its feasibility has already incurred
market research costs of £50,000. The actual cost of the asset is £100,000 and
the project is expected to yield the following returns:

Year 1 £90,000
Year 2 £80,000
Year 3 £70,000
If the discount rate is 12% the NPV of the project will be:
£294,000
£44,000
£140,000
£94,000
11. A project has an NPV of £12,632 when a discount rate of 12% is used and
the same project has an NPV of (£6,935) when a discount rate of 22% is used,
the actual internal rate of return of the project is:
6.5%
28.5%
16.5%
18.5%

12 A company is considering investing in a machine with a capital cost of

£300,000 with a useful life of 4 years. Annual running costs are expected to
amount to £276,000 including straight line depreciation of £70,000 per annum.
It is estimated that the machine can be disposed of at its net book value at the
end of its life.

The capacity of the machine will be 6 million items for the first two years but
this will fall to 5 million items in years 3 and 4. It is estimated that the
company will be able to sell whatever the machine produces. The average
contribution is £60 per 1,000 units. What is the payback period for the
machine?
1.92 years
2.09 years
0.94 years
1.94 years

13. The discount factor used to appraise capital investment decisions is a

measure of:
 The opportunity cost of capital of the business
The opportunity cost of capital of all businesses in the same industry
The current inflation rate
The current high street interest rate

14 Which one of the following statements is untrue?

Retained profits are the main source of business funds

The issuing of shares to raise finance can be expensive
Retained profits represent a free source of funds
Borrowing can increase the risk that a company faces