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Which method of investment appraisal has been found in surveys to be the least popular with Australian businesses?


A) Net Present Value.
B) Accounting rate of return.
C) Internal rate of return.
D) Payback.

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

Correct Answer

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Container Ltd, a manufacturing firm, is considering investing $110,000 in a new mainframe computer. It is estimated that net cash flow per year will be $30,000 and the computer will have a 10-year useful life and zero residual value. The machine will be depreciated on a straight-line basis. What is the accounting rate of return?


A) 10.55%.
B) 30.0%.
C) 22.72%.
D) 15.86%.

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

Correct Answer

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Projects can have multiple internal rates of return due to:


A) all positive cash flows.
B) all negative cash flows.
C) both positive and negative cash flows at different points during its life.
D) none of the above.

E) B) and C)
F) A) and B)

Correct Answer

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What discount rate should be used in Net Present Value assessments?


A) the weighted average cost of capital of the business.
B) the government bond rate.
C) the specific cost of capital associated with funding a particular project.
D) the expected rate of return required by ordinary shareholders.

E) A) and B)
F) A) and C)

Correct Answer

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The following data was given for three projects being considered by Manosteel Ltd. Only one project can be accepted due to funding limitations.  Project  IRR  NPV  Payback  A 16%$18,0007yrsB18%$100,0005yrsC15%$95,00010yrs\begin{array}{llcc}\text { Project } & \text { IRR } & \text { NPV } & \text { Payback } \\\text { A } & 16 \% & \$ 18,000 & 7 \mathrm{yrs} \\\mathrm{B} & 18 \% & \$ 100,000 & 5 \mathrm{yrs} \\\mathrm{C} & 15 \% & \$ 95,000 & 10 \mathrm{yrs}\end{array} Which project is the best given that Manosteel's required rate of return is 14%?


A) Project A.
B) Project B.
C) Project C.
D) All projects should be accepted, as all have a positive Net Present Value and an Internal Rate of Return greater than the required rate of return.

E) C) and D)
F) B) and D)

Correct Answer

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Depreciation is not included in Net Present Value analysis because it is:


A) a non-cash item.
B) an historic cost.
C) a fixed cost.
D) a variable cost.

E) B) and D)
F) B) and C)

Correct Answer

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The statement that is a disadvantage of the payback method of investment evaluation is:


A) It disregards the time value of money.
B) It disregards the post payback period cash flows.
C) It is based on cash flows.
D) Both A and B.

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

Correct Answer

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Which of the following is not a method for appraising potential investments?


A) Payback method.
B) Return on assets.
C) Accounting rate of return.
D) Net present value.

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

Correct Answer

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If you banked $27,778 today at an interest rate of 20%, in two years' time you would have:


A) $40,000.
B) $36,000.
C) $33,334.
D) $27,778.

E) None of the above
F) All of the above

Correct Answer

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It is important to get investment decisions right for which of the following reasons?


A) Large amounts of resources are often involved.
B) They may affect the business for many years.
C) They can be difficult and/or expensive to 'bail-out' of once started.
D) All of the above.

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

Correct Answer

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Which of the following statements is incorrect?


A) It may be very difficult to quantify all factors that impact on an investment decision.
B) Investment decisions are made easier as cash forecasts are always correct.
C) The validity of assumptions made in relation to an investment proposal may influence the final decision.
D) The results from using an investment appraisal method is only one input into the final decision.

E) A) and B)
F) All of the above

Correct Answer

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Manosteel Ltd is considering the purchase of a new machine for $100,000. It is to be depreciated on a straight-line basis and is estimated to have no residual value at the end of a useful life of 10 years. The tax rate is 30 per cent. What will be the annual cash tax saving in relation to depreciation expense?


A) $3,000.
B) $100.
C) $300.
D) $10,000.

E) C) and D)
F) A) and C)

Correct Answer

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Timothy Moore, Managing Director of Tiles Ltd, has received a report from his Finance Manager recommending four investment projects for his approval. However, the firm has only sufficient funds to invest in one project. The firm's rate of return is 6%. The Accounting Rate of Return for each project is: A - 12%, B - 9%, C - 13%, D - 15%. Short will select:


A) Project A.
B) Project B.
C) Project C.
D) Project D.

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

Correct Answer

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What is the assessment method widely used in practice which enables managers to screen investment projects to determine which projects can recoup their investment outlay the fastest?


A) internal rate of return method.
B) accounting rate of return method.
C) payback method.
D) net present value method.

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

Correct Answer

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What is the main disadvantage of the Internal Rate of Return method?


A) it ignores the scale of projects, which could lead to wrong decision-making.
B) it is difficult for management to incorporate it into decision-making.
C) it is too simplistic.
D) all of the above.

E) A) and B)
F) B) and C)

Correct Answer

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If the net present value analysis of a project resulted in a positive value and the company did not accept the project, it could be assumed that:


A) qualitative factors outweigh the benefit of the investment.
B) the net initial investment cannot be recovered.
C) the return is greater than that required by the company.
D) all of the above.

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

Correct Answer

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Relevant cash flows for investment decisions are:


A) expected cash flows that will not differ between alternatives.
B) actual cash flows that differ between alternatives.
C) expected cash flows that will differ between alternatives.
D) actual cash flows that do not differ between alternatives.

E) A) and C)
F) B) and C)

Correct Answer

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Gardall Ltd, a printing business, intends purchasing a new computerised printing machine for $900,000. The annual cash flows from the new machine are expected to be $150,000 per year. The machine has an eight-year useful life. The payback period is:


A) 8 years.
B) 5.33 years.
C) 5 years.
D) 6 years.

E) C) and D)
F) B) and D)

Correct Answer

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Which method for appraising investments is regarded as the 'superior' method?


A) NPV
B) ARR
C) PP
D) IRR

E) A) and C)
F) None of the above

Correct Answer

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To calculate the Accounting Rate of Return, it is necessary to determine annual profit. Annual profit is calculated on a/an:


A) market value basis.
B) cash basis.
C) accrual basis.
D) current cost basis.

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

Correct Answer

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