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Exam 12: Capital Investment Appraisal

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Question 21

Multiple Choice

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BTB Limited is investing £400,000 into a new project. The project will last for four years. At the end of the four years, the project assets will be sold for £100,000. Depreciation on project assets is provided on the straight line basis over four years. The net cash inflows from the project in years 1 to 4 are expected to be £150,000 per annum. What is the payback period for this project?

A) This project does not have a payback period.
B) 2 years 0 months
C) 2 years 8 months
D) 4 years 0 months

E) None of the above
F) B) and D)

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Question 22

Multiple Choice

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BDS Limited is planning to invest in a new project. The project will last for four years. Depreciation on project assets is provided on the straight line basis over the period of the project and depreciation of £560,000 will be charged on the project assets over the four years. £560,000 represents 70% of the cash outlay on non-current assets for the project. Net cash inflows from the project in years 1 to 4 are expected to be £190,000, £240,000, £260,000 and £264,000. It is anticipated that the project assets will be sold for their carrying amount at the end of year 4. What is the payback period for this project to the nearest month?

A) 1 year 10 months
B) 2 years 6 months
C) 3 years 5 months
D) 4 years 0 months

E) B) and D)
F) A) and D)

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Question 23

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BGG Limited is investing £700,000 into a new project today. The project will last for five years. A further investment into the project of £100,000 will be made at the end of year 2 of the project's life. At the end of the five years, all the project assets will be sold for £200,000. Depreciation on project assets is provided on the straight line basis over five years. The net cash inflows from the project in years 1 to 5 are expected to be £200,000, £220,000, £240,000, £280,000 and £260,000. BGG's cost of capital is 15%. What is the net present value of this project?

VCV Limited is investing £500,000 into a new project. The project will last for five years. At the end of the five years, the company will have to pay £50,000 to scrap the project's assets. The net cash inflows from the project in years 1 to 5 are expected to be £50,000, £100,000, £150,000, £200,000 and £250,000. VCV Limited has a required rate of return of 11%. What is the net present value of this project?

The directors of DPD Limited are considering a new investment proposal. The project will require an initial investment of £300,000 and a further investment at the end of year 3 of £150,000. Net cash inflows in years 1 to 5 are expected to be £75,000, £150,000, £225,000, £300,000 and £360,000. At the end of 5 years, the project will be discontinued and the project assets will be sold for an expected £100,000. DPD Limited has a required rate of return of 9%. What is the net present value of this proposal?

VKU Limited is planning a capital investment. Using a discount rate of 15%, the company has determined that its proposed investment project has a positive net present value of + £15,280. Using a discount rate of 19%, the company has determined that its proposed investment project will have a negative net present value of £3,660. Given the above net present value calculations, what is the internal rate of return of the proposed investment project to two decimal places?

Which of the following steps are involved in the calculation of the accounting rate of return of a proposed project? Please select all that apply.

BVC Limited is investing £900,000 into a new project today. The project will last for five years. At the end of year 3 of the project's life, half of the assets will be sold for £200,000. At the end of the five years, the remaining project assets will be sold for £50,000. The net cash inflows from the project in years 1 to 5 are expected to be £180,000, £240,000, £280,000, £320,000 and £220,000. BVC's cost of capital is 9%. What is the net present value of this project?

Which one of the following is a disadvantage of the net present value method of capital investment appraisal?

VCV Limited is investing £500,000 into a new project. The project will last for five years. At the end of the five years, the project assets will be sold for £200,000. Depreciation on project assets is provided on the straight line basis over five years. The expected net cash inflows from the project in years 1 to 5 are expected to be £50,000, £100,000, £150,000, £200,000 and £250,000. What is the accounting rate of return for this project?

Money received tomorrow is just as valuable as money received today.

Which one of the following statements does not describe the net present value method of capital investment appraisal?

Which one of the following is not a limitation of the internal rate of return investment appraisal technique?

Capital investment appraisal takes into account opportunity cost.

Which one of the following would not be a step in the payback method of capital investment appraisal?

BFT Limited is planning to invest in a new project. The project will last for four years and cost £800,000. Depreciation on project assets is provided on the reducing balance basis at the rate of 25% over the life of the project. Net cash inflows from the project in years 1 to 4 are expected to be £225,000, £250,000, £275,000 and £210,000. It is anticipated that the project assets will be sold for their carrying amount at the end of year 4. What is the accounting rate of return for this project?

The directors of TZA Limited are evaluating a new investment project which has a positive net present value of £4,000 when the project cash flows are discounted at a rate of 12%. When the investment project cash flows are discounted at the rate of 17%, the net present value of the project is - £2,000. What is the internal rate of return of the new investment project?

Dixon Limited has undertaken various capital investment appraisal calculations. Using a discount rate of 16%, the company has determined that its proposed investment project has a positive net present value of £100,000. Using a discount rate of 21%, the company has determined that its proposed investment project will have a negative net present value of £25,000. Given the above net present value calculations, what is the internal rate of return of the proposed investment project?

BGG Limited is investing £700,000 into a new project today. The project will last for five years. A further investment into the project of £100,000 will be made at the end of year 3 of the project's life. At the end of the five years, all the project assets will be sold for £200,000. Depreciation on project assets is provided on the straight line basis over five years. The net cash inflows from the project in years 1 to 5 are expected to be £200,000, £220,000, £240,000, £280,000 and £260,000. What is the payback period for this project?

Capital investment = the acquisition of short-term assets.