E4 Investment appraisal: risk, simulation and rationing

Written by Saad Rahman (ACCA)

ACCA · New at Expertise level · 8 questions

Name: ____________________ Date: ____________

NPVs of +$50,000 (p 0.3), +$20,000 (0.5) and -$40,000 (0.2) are expected. What is the expected NPV?
- A $17,000
- B $10,000
- C $-8,000
- D $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?
- A 30%
- B 50%
- C 80%
- D 20%
What does simulation do in investment appraisal?
- A Repeats the appraisal many times using random values for uncertain variables
- B Fixes all variables at their average
- C Replaces the discount rate
- D Avoids probabilities
Which is a disadvantage of simulation?
- A It is free
- B It needs probability distributions that may be hard to estimate
- C It cannot show risk
- D It uses only one variable
A risk-adjusted discount rate for a risky project is:
- A The cost of capital less a premium
- B The cost of capital plus a premium
- C The inflation rate
- D 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?
- A 0.50
- B 2.00
- C 0.30
- D 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?
- A $46,000
- B $25,000
- C $55,000
- D $30,000
For indivisible projects under capital rationing, how should they be compared?
- A By payback only
- B By testing combinations of whole projects
- C By cost only
- D By the profitability index only

Answer key

1. A, 2. D, 3. A, 4. B, 5. B, 6. A, 7. A, 8. B