FM D Investment appraisal

A project has a positive NPV. What does this mean?

• 1 It will pay back in one year
• 2 It has no risk
• 3 It is expected to add to shareholder wealth at the cost of capital
• 4 It reduces profit

A real rate of 5 percent and inflation of 3 percent give what money (nominal) rate?

• 1 8.00%
• 2 2.00%
• 3 8.15%
• 4 15.00%

Which discount rate should be used with money (nominal) cash flows?

• 1 The inflation rate
• 2 The money (nominal) cost of capital
• 3 Zero
• 4 The real cost of capital

A real project has cash flows of $40,000 a year for 3 years and costs $100,000. The real cost of capital is 5 percent. What is the NPV, to the nearest dollar?

• 1 $108,930
• 2 $20,000
• 3 $8,930
• 4 $-8,930

An asset costing $100,000 gets a 25 percent allowance in year 1 and the tax rate is 30 percent. What is the year 1 tax saving?

• 1 $30,000
• 2 $25,000
• 3 $2,500
• 4 $7,500

Machine A has an EAC of $6,309 and machine B has an EAC of $5,630. Which should be chosen and why?

• 1 B, because it has the lower equivalent annual cost
• 2 A, because it lasts longer
• 3 A, because it costs more
• 4 Neither

Under single-period capital rationing with divisible projects, how are projects ranked?

• 1 By NPV alone
• 2 By profitability index (NPV per unit of capital)
• 3 By payback
• 4 By cost

Which of these is a limitation of sensitivity analysis?

• 1 It uses probabilities
• 2 It considers all variables at once
• 3 It is too complicated
• 4 It looks at one variable at a time and gives no probabilities

A lease or buy decision should discount the cash flows at:

• 1 The after-tax cost of debt
• 2 Zero
• 3 The cost of equity
• 4 The risk-free rate

Which of these is a limitation of payback?

• 1 It is hard to calculate
• 2 It uses discounting
• 3 It looks at profit only
• 4 It ignores cash flows after the payback period