Quiz/mock Exam

Mbakeh has been offered an investment Jay Smith has been offered an investment
opportunity that will pay $500 at the end of opportunity that will pay $500 at the end of
every year, starting 1 year from now and every year, starting 1 year from now and
continuing forever. Assume the relevant continuing forever. Assume the relevant
discount rate is 6%. What is the maximum discount rate is 6%. What is the maximum
amount Mbakeh should pay for this amount Smith should pay for this
investment? investment?

a) $8,333.33 e) $8,333.33
b) $500 f) $500
c) $3,000 g) $3,000
d) The investment is not desirable h) The investment is not desirable

Paul Jackson invests £6,200 in an individual Aziz has been offered an investment that will
savings account (ISA), which is a type of pay him £6,000 3 years from today:
savings
accounts that offers tax exemptions to If he earns 8% compounded annually in a
residents treasury bond, what value should he place on
of the UK. If the ISA pays 3% annual interest, this opportunity today?
what will the account balance be after 3
years? e) £6,000
f) £8,762.60
A) £6,774.74 g) £2,762.70
B) £4,762.80 h) £4,762.80
C) £7,744.46
D) £4,648.20 What is the future value in exactly 3 years’
time of an investment of £1000 received
today and invested at 5% compound
interest?

b) £1,215.50
c) £1,157.63
d) £1,150
e) £1,102.5
 Which of the following is considered a
benefit of payback method of investment
Hussain has been offered an investment that appraisal?
will pay him £6,000 3 years from today: a) Both present and future values are
being considered
If he earns 8% compounded annually in a
b) The time vale of money is considered
treasury bond, what value should he place on
c) All cash flows arising on the project
this opportunity today?
are brought into the calculation
d) It is simple to calculate
a) £6,000
b) £8,762.60
c) £2,762.70 Which one of the following is an acceptable
d) £4,762.80 definition of the Internal rate of return?

E) The annualized profits as a

percentage of the amount invested.
F) The discounted cash flow as a
Under which of the following conditions percentage of the amount invested.
could cumulative discount factor be used? G) The time it takes to repay the initial
a) Where the same future values are investment
received or paid each year for several H) The discount rate results in a zero
years. net present value for a project.
b) Where different future values are
received or paid each year for several
years
c) Where the payback period method of Projects Pine (PP) and Kine (PK) are two
investment appraisal is being used. alternative projects costing £3,000 and
d) Where the accounting rate of return £4,000 respectively. PP is forecast to
method of investment appraisal is generate £10,000 in one year and B, £12,000
being used. in two years’ time. Using a 10% discount
factor for each project, calculate their net
Which of the following methods of present value.
investment appraisal requires a trial and A) Pine = £9,090; Kine = 5,912
error approach for its calculation? B) Pine = £6,090; Kine = 0.826
a) Internal rate of return C) Pine = £6,090; Kine = 5,912
b) Payback period D) Pine = £5,912; Kine = 6,090
 c) Accounting rate of return
d) Net present value

Calculate the payback period for two

equipment installation projects C and D with
an initial investment of £20,000 and £30,000
respectively. C is estimated to produce
Which one of the following is an acceptable annual cash flows of £4,000 for 10 years and
definition of the Internal rate of return? (10) D’s estimated cash flow is £5,000 for eight
A) The annualized profits as a years.
percentage of the amount invested. A). Project C = 5 years; Project D = 6 years
B) The discounted cash flow as a
percentage of the amount invested. B) Project C = 10 years; Project D = 8 years
C) The time it takes to repay the initial C) Project C = 5 years; Project D = 4 years
investment
D) The discount rate results in a zero D) Project C = 10 years; Project D = 8 year
net present value for a project.
Decision rule for Internal rate of return is:
a) Accept, if IRR > Cost of capital
b) Accept, if IRR < Cost of capital
A two-year project is being evaluated using a
c) Accept if IRR = Cost of capital
discount rate of 7% p.a. It is expected to have
d) All of the above
a cash flow of £40,000 at the end of its first
year and £60,000 at the end of its second
…… is the discount rate which is used in
year. What is the present value of the future
capital budgeting
cash flow if the discount factors are as
follows: Year 1 = 0.935 and year 2 = 0.873?
a) Risk free rate
(2)
b) Cost of capital
a) £100,000 c) Risk premium
b) £89,780 d) Beta rate
c) £91,020
d) £72,320 Which concept represents the amount of
time that it takes for a capital budgeting
project to recover its initial cost?

a) Maturity period
b) Payback period
c) Appraisal period
d) Investment period
 The shorter the payback period –
a) The riskier the project
b) The less risky the project
c) The NPV of the project is low
d) The NPV of the project is higher

Which of the statement below is the IRR

decision rule?
A) Projects with positive NPV should be
selected
Using the net present value method of
B) Projects with IRR greater than the
investment appraisal, contrast the purchase
cost of capital is desirable
of two cameras Zinc and Topaz costing
C) The project with greater economic
£10,000 and £12,000 respectively. Camera
value added should be selected
Zinc is forecast to generate £9,000 for three
D) Projects with negative NPV should be
years and Camera Topaz, £7,000 for four
selected
years. Using a 6% discount factor, state which
camera is more desirable for the business.
The difference between the present value of
cash inflows and the present value of cash
A) Camera Zinc has a higher NPV, therefore outflows associated with a project is known
more desirable than Topaz as:
a) Net present value of the project
B) Camera Topaz has a higher NPV, therefore
b) Net future value of the project
more desirable than Zinc
c) Net historical value of the project
C) Camera Zinc has a negative NPV, therefore d) Net salvage value of the project
more desirable than Topaz
D)Both Cameras have the same NPV

Calculate the payback period for two

equipment installation projects A and B with
an initial investment of £20,000 and £30,000
respectively. A is estimated to produce
annual cash flows of £4,000 for 10 years and
B’s estimated cash flow is £5,000 for eight
years.
A). Project A = 5 years; Project B = 6 years

B) Project A = 10 years; Project B = 8 years

C) Project A = 5 years; Project B = 4 years

D) Project A = 10 years; Project B = 8 years

Balamory PLC is considering the purchase of

a piece of equipment with a 3-year life span
that costs Rs15,060. The company apply a.
discount rate of 15% and expected annual
cashflow is Year 1 = Rs7,000; year 2 = Rs8,000
and year 3 = 9,000. Calculate the net present
value for the project. (7)

a) Rs15,264
b) Rs3,000
c) Rs9,744
d) Rs12,000

A project with a shorter payback period

implies that ……….
a. The project will have more Net
Present Value
b. The project will have less Net
Present Value
c. The project carries a greater
amount of risk
d. The project carries a lesser
amount of risk
What is the main difference between
accounting profit and economic profit?
A) Economic profit is based on cash
flows, while accounting profit is
based on specific rules for
accountancy
B) Accounting profit includes the last
accounting period, while
economic profit includes the
entire life of a firm’s existence
C) Accounting profit has a small
charge for debt, but economic
profit has a small charge for the
providers of capital
D) All of the above

The main limitation of using the

payback period
A) It does not consider the cost of
capital and timing of return
B) When compared to the accounting
rate of return method, it is more
difficult to calculate and understand
C) It does not take the initial
investment into account
D) All of the above

…….…. Is an example of a capital investment

A) Replacement of a broken equipment
B) Expansion of production facilities
C) Development of employee training
programme
D) All of the above