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| 1 | |
Emma Hamilton, the Project Evaluation Manager for a large multinational food manufacturing company, has been gathering information for a long-term investment in a new high-tech food processing plant, including the forecasting of annual cash inflows and cash outflows over a 20-year period. The food processing plant is expected to have a 30-year economic life and will cost approximately $500 million. Emma’s assistant, a graduate trainee named Brendan Smith, is using a number of capital budgeting techniques to analyse the food processing plant. One of Brendan’s calculations includes depreciation in the calculation; Brendan must be calculating the: |
| | A) | internal rate of return |
| | B) | net present value |
| | C) | payback period |
| | D) | accounting rate of return |
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| 2 | |
Generally, which of the following relationships will be observed? |
| | A) | Accounting rate of return (using initial investment) < internal rate of return < accounting rate of return (using average investment) |
| | B) | Accounting rate of return (using initial investment) > internal rate of return > accounting rate of return (using average investment) |
| | C) | Accounting rate of return (using initial investment) = internal rate of return = accounting rate of return (using average investment) |
| | D) | Accounting rate of return (using initial investment) = payback |
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| 3 | |
If a capital expenditure proposal has a positive net present value: |
| | A) | the required rate of return is higher than the discount rate |
| | B) | the required rate of return is lower than the discount rate |
| | C) | the hurdle rate is higher than the discount rate |
| | D) | the internal rate of return is higher than the discount rate |
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| 4 | |
The weighted average of the interest rates that a firm incurs on its borrowings and on its share issues is called: |
| | A) | the discount rate |
| | B) | the internal rate of return |
| | C) | the hurdle rate |
| | D) | the cost of capital |
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| 5 | |
In the case where a capital expenditure project is necessary for the business to continue (i.e. for safety, environmental or legal reasons) and the NPV is negative or the IRR is lower than acceptable, a business should select the course of action based on: |
| | A) | the minimisation of the NPV of the costs to be incurred |
| | B) | the maximisation of the NPV of the costs to be incurred |
| | C) | the minimisation of the IRR of the costs to be incurred |
| | D) | the maximisation of the IRR of the costs to be incurred |
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| 6 | |
Which one of the following is not a reason why the payback method is widely used in practice? |
| | A) | Simplicity. |
| | B) | Complexity. |
| | C) | Ability to screen investment projects. |
| | D) | Cash shortages. |
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| 7 | |
The assumptions underlying discounted cash flow analysis include: |
| | A) | cash flows occur at year-end |
| | B) | cash flows are known with certainty |
| | C) | depreciation is included in cash flows |
| | D) | Choices 1 and 2 |
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| 8 | |
If a company is evaluating a capital expenditure proposal that has a net present value of $0 at a discount rate of 10%, a discount rate of 8% would result in: |
| | A) | a negative net present value |
| | B) | a positive net present value |
| | C) | a present value of $0 |
| | D) | an internal rate of return of 9% |
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| 9 | |
If a company is evaluating a capital expenditure proposal that has a net present value of $0 at a discount rate of 10%, a discount rate of 12% would result in: |
| | A) | a negative net present value |
| | B) | a positive net present value |
| | C) | a present value of $0 |
| | D) | an internal rate of return of 9% |
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| 10 | |
Which one of the following methods uses the more realistic reinvestment assumption? |
| | A) | Internal rate of return method. |
| | B) | Net present value method. |
| | C) | Payback method. |
| | D) | Accounting rate of return method. |
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