E4 Investment appraisal: risk, simulation and rationing

NPVs of +$50,000 (p 0.3), +$20,000 (0.5) and -$40,000 (0.2) are expected. What is the expected NPV?

• 1 $17,000
• 2 $10,000
• 3 $-8,000
• 4 $30,000

In the same project (NPVs of +$50,000, +$20,000 and -$40,000 with probabilities 0.3, 0.5 and 0.2), what is the probability of a negative NPV?

• 1 30%
• 2 50%
• 3 80%
• 4 20%

What does simulation do in investment appraisal?

• 1 Repeats the appraisal many times using random values for uncertain variables
• 2 Fixes all variables at their average
• 3 Replaces the discount rate
• 4 Avoids probabilities

Which is a disadvantage of simulation?

• 1 It is free
• 2 It needs probability distributions that may be hard to estimate
• 3 It cannot show risk
• 4 It uses only one variable

A risk-adjusted discount rate for a risky project is:

• 1 The cost of capital less a premium
• 2 The cost of capital plus a premium
• 3 The inflation rate
• 4 Zero

Project A has NPV $30,000 for $100,000 and project B has NPV $25,000 for $50,000. What is the profitability index of B?

• 1 0.50
• 2 2.00
• 3 0.30
• 4 0.83

Project A has NPV $30,000 for $100,000 and project B has NPV $25,000 for $50,000. Both are divisible and $120,000 is available. What is the best total NPV?

• 1 $46,000
• 2 $25,000
• 3 $55,000
• 4 $30,000

For indivisible projects under capital rationing, how should they be compared?

• 1 By payback only
• 2 By testing combinations of whole projects
• 3 By cost only
• 4 By the profitability index only