MCQs (Just for brushing up of Fundamentals)

Which investment analysis tool calculates a rate of return based on a net present value of
zero?
a. Pay Back Period
b. Internal Rate of Return
c. Accounting Rate of Return
d. Inflation Adjusted Return
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Choose the BEST answer to explain the results of return on assets.
a. A low ratio shows favorable results.
b. The higher the ratio, the better.
c. A high ratio shows unfavorable results.
d. The lower the ratio, the better.
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Which of the following type of investments offer ownership of the company?
a. Bonds
b. Commercial Papers
c. Savings Accounts
d. Equity
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Compute the annual dividend paid by a stock that has a current share price of Rs. 25.00 and a
dividend yield of 5%.
a. 10
b. 12.50
c. 15
d. 20
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Receivable Days are 50, Inventory Days 40 and Accounts Payable Days are 30. Calculate the
working capital cycle
a. 60
b. 120
c. 70
d. 50
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What is the present value of the following cash flow stream, discounted at 5% p.a.: Year 1,
$100; Year 2, $250; Years 3 through 20, $400?
a. 4563
b. 5634
c. 8876
d. 3654

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A project has the following cash flows:

What is the project NPV if the interest rate is 6%?

a. 70.36
b. 90.87
c. 76.45
d. 87.65
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The net present value is the difference between the present value of cash inflows and cash
outflows. If the net present value has a positive amount, there are more cash inflows than
cash outflows and vice versa.
A depreciation tax shield is:
a. An after tax cash outflow
b. A reduction in income tax
c. Expense caused due to depreciation
d. Tax liability on depreciation
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The most risky stage of the capital budgeting process is:
a. Identifying alternative possible projects
b. Raising funds to initially support the project
c. Monitoring
d. Forecasting cashflow
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Which of the following is not relevant for projecting terminal year cashflow:
a. Historical cost of equipment
b. Salvage value of equipment
c. Any tax shield due to loss on sale of equipment
d. Working capital inflow
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A company X bought a machinery for $100 and expects to give the following cash
inflow: Year 1: 50, Year 2: 40, Year 3: 10, Year 4: 15
The Required rate of return is 4%. Calculate the Payback Period and Discounted
Payback Period?
a. 3 and 3.47
b. 3.47 and 3
c. 3 and 4
d. 4 and 3
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On the basis of following information Calculate the Net Present Value of each project
and recommend the most suitable project

Project A Project B

Year CFAT Year CFAT

1 12,000 1 22,000

2 14,000 2 20,000

3 16,000 3 16,000

4 20,000 4 14,000

5 22,000 5 12,000

Cash Flows 84,000 84,000

Initial Investment – 60,000

After tax Cost of Capital is 10%

NPV ? ?

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Working Capital Projection
Prepare a statement of projected working capital on the basis of following information
 The following figures for the financial year ended on March 31, are given to you to enable you
to ascertain the working capital requirements of the company in the basis of following
assumptions and information.
a. Annual Sales Rs. 120 crores
b. Credit sales – 80% of total sales
c. Receivable Credit period – 45 days
d. Annual Purchases – 75 crores with credit period of 30 days
e. Annual operating expenses Rs. 20 crores. Average credit period is 15 days
f. Other Annual expenses Rs. 5 crores. Paid in advance at the commencement of every quarter
g. Prepaid Insurance expected for next financial year is 10 lacs
Cash balance to be maintained @ 10% of Operating and Other expenses
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Prepare a statement of projected working capital on the basis of following information. The
following figures for the financial year ended on March 31 2015, are given to you to enable
you to ascertain the working capital requirements of the company in the basis of following
assumptions and information. (15 Marks)
 Annual Sales Rs. 200 crores
 Credit sales – 90% of total sales
 Receivable Credit period – 60 days
 Inventory 45 Days of sales
 Annual Purchases – 150 crores with credit period of 30 days
 Annual operating expenses Rs. 30 crores. Average credit period is 15 days
 Other Annual expenses Rs. 10 crores. Paid in advance at the commencement of every
quarter
 Prepaid Insurance expected for next financial year is Rs. 1 crore
 Cash balance to be maintained @ 15% of Operating and Other expenses

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Practical Questions
Mr. Shemaroo, CFO of Digital Entertainment Limited is evaluating options either to Lease the
Multiplex or Build a Multiplex for Screening of Hollywood Movies for next 5 years. You are
requested to assist Mr. Shemaroo to take the decision basis following data
Option 1
 Lease rental for next 5 years Rs. 3 crore per annum

Option 2
 Construction Cost Rs. 8. crores
 Annual operating expenses of Rs. 1.5 crore
 Depreciation method – Straight line method / 5 equal instalments
Other Information
 Tax rate at 30%
 Cost of capital / discount rate @ 10%. The discount table is as follows.
Year 1 Year 2 Year 3
0.909 0.826 0.751

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Investment Decisions
PHL, an international courier service, is planning to set up a new distribution office. PHL has
an option to buy a building at a cost of $ 20,000. Other equipment for the office will cost $
15,000 including installation. An investment of $ 5,000 in the net working capital is also
required at the time of setting up the office
Economic life of the office is estimated to be three years. After three years, market value of
the building will be $ 10,000 and its book value $ 9,500 and market value and book value of
the equipment will be zero. Additional revenue from this office will be $ 75,000 per annum.
Variable cost is estimated to be 75% of the revenue and fixed cost (excluding depreciation) is
estimated as $ 5,000 per annum.
Find the NPV of the project assuming corporate tax rate @ 40% and Cost of capital @ 12%.
Depreciation for building and equipments : Yr 1 = $ 8,000, Yr 2 = $ 10,500, Yr 3 = $ 7,000

Investment evaluation
Kalpaturu Pharmaceuticals has provided the following information with respect to launch of a
new project. You are required to calculate the NPV and Discounted Payback period of the
Project and advise the company whether the company should go ahead with the decision or
reject the same.
• Initial Capital Investment for purchase of manufacturing equipment is Rs. 80 lacs and the
life of the equipment is 4 years with zero salvage value. The company adopts straight line
method of depreciation
• The first year expected sales are Rs. 50 lacs and expected to grow by 12% every year
• Material Costs are expected to be 40% of sales in 1st year and will increase by 2% each
year
• Employee costs are expected to be 15% of sales of 1st year and will increase by 1% every
year
• Other costs are expected to be 7% of the sales of 1st year and will increase by 3% every
year
• Income Tax rate is 35%
• Discount rate applicable is 10%
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Investment Decisions
ABC Corp wants to replace an old factory to produce paper by a new factory. Old factory is
10 years old and was set up initially at $ 200,000. It has an expected life of 20 years and the
expected salvage value of the factory after 20 years from point it was set up is zero. The
factory was depreciated in a straight line method, and the current book value of the factory is
$100,000. Components of the old factory can be sold at $60,000 in the market currently.
All inclusive cost of setting up the new factory is $400,000. It has a life of 10 years, and it
will improve the operational efficiency as compared to old factory, translating into annual
savings of $50,000. Depreciation is to be done in straight line methods with the salvage value
of new factory as $40,000 after 10 years. $ 40,000 is also expected to be the market value of
the new plant after 10 years. Net working capital requirements due to new factory will rise by
$10,000 at the time of replacement.
Assume tax rate = 40%, WACC = 12%
Should ABC Corp consider setting up the new factory replacing the old one?
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Theory Questions

Short note of Net Present Value

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Short Note on Internal Rate of Return
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What are the factors driving cost of capital of the company?
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What are the Different Types of Cash Flows in the Business?