K2 Long-term decision making

Written by Saad Rahman (ACCA)

ACCA · New at Knowledge level · 8 questions

Name: ____________________   Date: ____________

1. An investment of $200,000 returns $80,000 a year for 4 years. The cost of capital is 12 percent. What is the NPV to the nearest dollar?

   • A $120,000
   • B $80,000
   • C -$42,988
   • D $42,988

2. An investment of $200,000 returns $80,000 a year. What is the payback period?

   • A 2.5 years
   • B 0.4 years
   • C 4 years
   • D 2 years

3. NPV at 20 percent is $7,099 and at 25 percent it is -$11,072. What is the approximate IRR using interpolation?

   • A 22.5%
   • B 25.0%
   • C 22.0%
   • D 20.0%

4. A nominal rate of 12 percent compounded monthly gives an effective annual rate of:

   • A 13.00%
   • B 12.00%
   • C 12.68%
   • D 1.00%

5. A project's total profit over 4 years is $120,000, an average of $30,000 a year, on an initial investment of $200,000. What is the ROCE based on the initial investment?

   • A 60%
   • B 30%
   • C 25%
   • D 15%

6. What is a limitation of the payback method?

   • A It always rejects good projects
   • B It ignores cash flows after the payback period
   • C It cannot be calculated
   • D It uses accounting profit

7. What does a positive NPV mean?

   • A The payback is less than a year
   • B The project is not worth doing
   • C The IRR is lower than the cost of capital
   • D The project is expected to increase wealth at the required rate of return

8. What is the present value of $10,000 received in 3 years at a discount rate of 8 percent?

   • A $7,938
   • B $7,600
   • C $12,597
   • D $8,000