Which TWO of the following are typically benefits of a shorter replacement cycle?

A professional kitchen is attempting to choose between gas and electricity for its main heat source. Once a choice is made, the kitchen intends to keep to that source indefinitely. Each gas oven has an NPV of $50,000 over its useful life of 5 Each electric oven has an NPV of $68,000 over its useful life of 7 years. The cost of capital is 8%.

Which should the kitchen choose and why?

Which of the following is potentially a benefit to the lessee if they lease as opposed to buy?

NB Co is faced with an immediate capital constraint of $100m available to invest.

It is considering investing in four divisible projects:

What is the NPV generated from the optimum investment programme if the projects were indivisible?

$ ____ millions

NB Co is faced with an immediate capital constraint of $100m available to invest.

It is considering investing in four divisible projects:

What is the NPV generated from the optimum investment programme?

$ ____ millions

Which of the following is always true about capital rationing?

1. The profitability index is suitable for handling multiple-period capital rationing problems if projects are divisible.
2. Projects being divisible is an unrealistic assumption.

AB Co is considering either leasing an asset or borrowing to buy it, and is attempting to analyse the options by calculating the NPV of When comparing the two, AB Co is uncertain whether it should include interest payments in its option to 'borrow and buy' as it is a future, incremental cash flow associated with that option. AB Co is also uncertain which discount rate to use in the NPV calculation for the lease option.

How should AB Co treat the interest payments and what discount rate should it use?

A lease versus buy evaluation has been The management accountant performed the calculation by taking the saved initial outlay and deducting the tax- adjusted lease payments and the lost capital allowances. The accountant discounted the net cash flows at the post-tax cost of borrowing. The resultant net present value (NPV) was positive.

Assuming the calculation is free from arithmetical errors, what would the conclusion for this decision be?

PD Co is deciding whether to replace its delivery vans every year or every other The initial cost of a van is $20,000. Maintenance costs would be nil in the first year, and $5,000 at the end of the second year. Secondhand value would fall from $10,000 to $8,000 if it held onto the van for 2 years instead of just 1. PD Co's cost of capital is 10%.

How often should PD Co replace its vans, and what is the equivalent annual cost (EAC) of that option?

Replace every EAC

Which of the following statements is CORRECT?

A company has calculated the NPV of a new project as follows:

What is the sensitivity of the project decision to a change in sales volume?

A project has the following cash flows.

At the company's cost of capital of 10% the NPV of the project is$16,800.

Applying sensitivity analysis to the cost of capital, what percentage change in the cost of capital would cause the project NPV to fall to zero?

SAC Co has a cost of capital of 8% and is appraising project Gamma. It has the following cash flows.

What is the adjusted payback period for this project?

An investment project has a cost of $12,000, payable at the start of the first year of operation. The possible future cash flows arising from the investment project have the following present values and associated probabilities:

What is the expected value of the net present value of the investment project? (to the nearest $100)

Which of the following statement is NOT true?

Which of the following is true about the 'inflation' figure that is included in the money cost of capital?

Juicy Co is considering investing in a new industrial juicer for use on a new contract. It will cost $150,000 and will last 2 Juicy Co pays corporation tax at 30% (as the cash flows occur) and, due to the health benefits of juicing, the machine attracts 100% tax- allowable depreciation immediately.

Given a cost of capital of 10%, what is the minimum value of the pre-tax contract revenue receivable in two years which would be required to recover the net cost of the juicer?

Shadowline Co has a money cost of capital of 10%. If inflation is 4%, what is Shadowline Co's real cost of capital? (to one decimal place)

FW Co is expecting a receipt of $10,000 (in real terms) in 1 year's time.

If FW Co expects inflation to increase, and receipts are expected to rise in line with the general rate of inflation, what impact will this have on the present value of that receipt?

AM Co will receive a perpetuity starting in 2 years' time of $10,000 per year, increasing by the rate of inflation (which is 2%).

What is the present value of this perpetuity assuming a money cost of capital of 10.2%?

NCW Co is considering investing $10,000 immediately in a 1-year project with the following cash flows.

The cash flows will arise at the end of the year. The above are stated in current terms. Income is subject to 10% inflation; expenses will not vary. The real cost of capital is 8% and general inflation is 2%.

Using the money cost of capital to the nearest whole percentage, what is the NET present value of the project?

AW Co needs to have $100,000 working capital in place immediately for the start of a 2- year project. The amount will stay constant in real terms. Inflation is running at 10% per year, and AW Co's money cost of capital is 12%.

What is the present value of the cash flows relating to working capital?

A project has the following projected cash inflows.

Working capital is required to be in place at the start of each year equal to 10% of the cash inflow for that year. The cost of capital is 10%.

What is the present value of the working capital?

A company receives a perpetuity of $20,000 per year in arrears, and pays 30% corporation tax 12 months after the end of the year to which the cash flows relate.

At a cost of capital of 10%, what is the after-tax present value of the perpetuity?

SW Co has a 31 December year end and pays corporation tax at a rate of 30%, 12 months after the end of the year to which the cash flows It can claim tax-allowable depreciation at a rate of 25% reducing balance. It pays $1m for a machine on 31 December 20X4. SW Co's cost of capital is 10%.

What is the present value on 31 December 20X4 of the benefit of the first portion of tax- allowable depreciation?

Paulo plans to buy a holiday villa in five years' time for He estimates the cost will be $1.5m. He plans to set aside the same amount of funds each year for five years, starting immediately and earning a rate of 10% interest per year compound.

To the nearest $100, how much does he need to set aside each year?

Which of the following statements about NPV and IRR is accurate?

A lease agreement has an NPV of ($26,496) at a rate of 8%. The lease involves an immediate down payment of $10,000 followed by 4 equal annual payments.

What is the amount of the annual payment?

A project has an initial outflow followed by years of inflows.

What would be the effect on NPV and the IRR of an increase in the cost of capital?

Which of the following are CORRECT advantages of the IRR approach to investment appraisal?

Four mutually exclusive projects have been appraised using net present value (NPV), internal rate of return (IRR), return on capital employed (ROCE) and payback period (PP).
The company objective is to maximise shareholder wealth.

Which should be chosen?

JCW Co is appraising an opportunity to invest in some new machinery that has the following cash flows.

What is the internal rate of return of the project, calculated using discount factors for 10% and 15%? (to the nearest whole %)

JCW Co is appraising an opportunity to invest in some new machinery that has the following cash flows.

At a cost of capital of 10% what is the net present value of this project? (to the nearest $100)

A newspaper reader has won first prize in a national competition and they have a choice as to how they take the prize:

Assuming a cost of capital of 10%, which would you advise and why?

An investor has a cost of capital of 10%. She is due to receive a 5-year annuity starting in 3 years' time of $7,000 per year.

What lump sum amount would you need to offer today to make her indifferent between the annuity and your offer? (to the nearest $)

$ ________

An accountant is paid $30,000 per year and spends 2 weeks working on appraising project alpha.

Why should the accountant NOT charge half of her month's salary to the project?

EE Co is considering investing in a new 40-year project which will require an initial investment of $50,000 (with zero scrap value) and has a payback period of 20 years. The 40-year project has consistent cash flows each year.

What is the ROCE? (using the average investment method, to one decimal place)

A project has average estimated cash flows of $3,000 per year with an initial investment of $9,000.

Depreciation is straight-line with no residual value and the project has a five-year life span. The company has a target return on capital employed (ROCE) of 15% and a target payback period of 2.5 years. ROCE is based on initial investment.

Under which investment appraisal method(s), using the company's targets, will the project be accepted?

1. ROCE
2. Payback basis

Which of the following is a drawback of the payback period method of investment appraisal?

LW Co has a half empty factory on which it pays $5,000 pa If it takes on a new project, it will have to move to a new bigger factory costing $17,000 pa and it could rent the old factory out for $3,000 pa until the end of the current lease.

What is the rental cost to be included in the project appraisal?

A new project being considered by BLW Co would require 1,000 hours of skilled The current workforce is already fully employed but more workers can be hired in at a cost of $20 per hour. The current workers are paid $15 per hour on a project that earns a contribution of $10 per hour.

What is the relevant cost of labour to be included in the project appraisal?

SW Co has a barrel of chemicals in its warehouse that it purchased for a project a while ago at a cost of $1,000. It would cost $400 for a professional disposal company to collect the barrel and dispose of it However, the chemicals could be used in a potential project which is currently being assessed.

What is the relevant cost of using the chemicals in a new project proposal?

Which TWO of the following are benefits of the ROCE method of investment appraisal?

NW Co is considering investing $46,000 in a new delivery lorry that will last for 4 years, after which time it will be sold for $7,000. Depreciation is charged on a straight-line basis. Forecast operating profits/(losses) to be generated by the machine are as follows.

Assuming operational cash flows arise evenly over the year, what is the payback period for this investment? (to the nearest month)

NW Co is considering investing $46,000 in a new delivery lorry that will last for 4 years, after which time it will be sold for $7,000. Depreciation is charged on a straight-line basis. Forecast operating profits/(losses) to be generated by the machine are as follows.

What is the return on capital employed (ROCE) for the lorry? (using the average investment method, to the nearest %)