AFM Advanced investment appraisal

A project costs $1,000 at time 0 and gives inflows of $500, $600 and $700 in years 1 to 3. The reinvestment rate is 8 percent. The terminal value of the inflows at the end of year 3 is:

• 1 $1,800
• 2 $1,931
• 3 $1,500
• 4 $2,100

Using the terminal value of $1,931 and an outlay of $1,000, the modified internal rate of return over three years is closest to:

• 1 19.3%
• 2 24.5%
• 3 10.0%
• 4 31.1%

In adjusted present value, the base case NPV is calculated by discounting the project cash flows at:

• 1 The cost of debt
• 2 The ungeared cost of equity
• 3 The WACC
• 4 The risk free rate

Under capital rationing, where projects are divisible and not repeatable, the correct approach is to rank projects by:

• 1 Profitability index (NPV per unit of capital)
• 2 Accounting rate of return
• 3 Size of the NPV
• 4 Payback period

A real option to delay a project until more information is available is most like a:

• 1 Call option
• 2 Put option
• 3 Forward contract
• 4 Swap

An option to abandon a project and sell the assets if it fails resembles a:

• 1 Put option
• 2 Call option
• 3 Futures contract
• 4 Interest rate swap

A project's value is most sensitive to an input if:

• 1 The input is the largest number
• 2 It is a fixed cost
• 3 The input is certain
• 4 A small change in that input produces a large change in NPV