Investment Appraisal Chapter -12

1) A one-year investment yields a return of 15%. The cash returned from the investment,
including principal and interest, is $2,070. The interest is
a) $250
b) $270
c) $300
d) $310.50

2) If a single sum of $12,000 is invested at 8% per annum with interest compounded

quarterly, the amount to which the principal will have grown by the end of year three is
approximately.
a) $15,117
b) $9,528
c) $15,219
d) $30,924

3) A bank offers depositors a nominal 4% pa, with interest payable quarterly. What is the
effective annual rate of interest?
a) 1%
b) 4%
c) 1.025%
d) 4.06%

4) A project requiring an investment of $1,200 is expected to generate returns of $400 in

years 1 and 2 and $350 in years 3 and 4. If the NPV = $22 at 9% and the NPV = - $4 at 10%,
what is the IRR for the project?
a) 9.15%
b) 9.85%
c) 10.15%
d) 10.85%

5) House prices rise at 2% per calendar month. The annual rate of increase to one decimal
place is
a) 24%
b) 26.8%
c) 12.7%
d) 12.2%

6) Find the present value of ten annual payments of $700, the first paid immediately and
discounted at 8% pa, giving your answer to the nearest $.
a) $4,697
b) $1,050
c) $4,435
d) $5,073

7) How much should be invested now (to the nearest $) to receive $24,000 per annum in
perpetuity if the annual rate of interest is 5%? $ ______________
State your answer to the nearest whole percent.

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8) An investment project has a positive net present value (NPV) of $7,222 when its cash
follows are discounted at the cost of capital of 10% per annum. Net cash inflows from the
project are expected to be $18,000 per annum for five years. The cumulative discount
(annuity) factor for five years at 10% is 3.791. What is the investment at the start of the project?
a) $61,016
b) $68,238
c) $75,460
d) $82,778

9) The following statements relate to an investment project that has been discounted at
rates of 10% and 20%.
1. The discounted payback period at 10% will be longer than the discounted payback period at 20%.
2. The discounted payback period at 20% will be longer than the discounted payback period at 10%.
3. The non-discounted payback period will be longer than the discounted payback period.
4. The non-discounted payback period will be shorter than the discounted payback period.
Which of the statements are true?
a) 1 and 3
b) 1 and 4
c) 2 and 3
d) 2 and 4

10) A capital investment project has net present values as follows:

At 5% per annum discount rate $69,700 positive
At 14% per annum discount rate $16,000 positive
At 20% per annum discount rate $10,500 negative
What is the BEST approximation of the internal rate of return (IRR)?
a) 17.6%
b) 22.7%
c) 18.0%
d) 16.7%

11) A bank account pays a nominal 4.5% per annum with interest payable every three
months. What is the effective annual rate of interest?
a) 4.5%
b) 1.125%
c) 6.018%
d) 4.5765%

12) A company is considering an investment of $200,000 to be made in a project now (ie

Time 0). The project is expected to yield incremental cash inflows of $100,000 per
annum of three years starting in one year's time. The annuity factor over three years
(Time 1 to 3) at 19% per annum is 2.14. The company has already spent $50,000 in
researching the project. What is the net present value of the project at a rate of 19% per annum (to
the nearest $'000)?
a) $36,000 positive
b) $14,000 negative
c) $36,000 negative
d) $14,000 positive

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13) The following graph shows the net present value of an investment project at a range of
discount rates:

The cost of capital is 10%. Which of the following statements relating to the above graph
is true?
a) The internal rate of return (IRR) > 9%
b) The net present value (NPV) is positive discounted at 15%
c) The internal rate or return is (IRR) < 10%
d) The net present value (NPV) is negative at 11%

14) Which of the following statements describes an annuity?

a) A fixed sum payable at some future date
b) A variable annual payment that lasts forever
c) A constant annual payment for a given time period
d) A variable annual payment for a given time period

15) An investment project with an initial cost of $28,750 is expected to have the following
cash inflows:
Year 1 $10,000
Year 2 $17,750
Year 3 $25,000
Year 4 $12,500
What is the payback period?
a) Between two and three years
b) Two years
c) Between one and two years
d) Between three and four yeas

16) If interest is compounded over periods of less than one year what is the effective annual
rate in relation to the nominal rate?
a) Lower than the nominal rate
b) Higher than the nominal rate
c) Impossible to say without further information
d) the same as the nominal rate

17) What is the decision rule for accepting a capital investment project on financial criteria?
a) Accept if the internal rate of return is less than the cost of capital
b) Accept if the net present value is negative

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c) Accept if the payback is less than the project life

d) Accept if the net present value is positive

18) A company is considering a project which requires an initial investment of $200,000.

Cash inflows from the project are expected to be:
Year 1 $120,000
Year 2 $100,000
Year 3 $80,000
Projects of this type are to be discounted at 12% per annum. Extracts from discount tables are:
Rate Year 1 Year 2 Year 3 Year 4 Year 5
12% 0.893 0.797 0.712 0.636 0.567
What is the net present value of the project?
a) $23,720
b) $223,720
c) $43,820
d) $100,000

19) A company has decided to lease a piece of equipment, paying $8,000 per annum for six
years. The first payment is to be made on receipt of the equipment. The equipment
delivered immediately. Annuity factors at a discount rate of 10% per annum are:
Year 0 to 5 4.791
Year 1 to 5 3.791
Year 1 to 6 4.355
What is the present value at Year 0 of the lease payments at a discount rate of 10% per
annum?
a) $30,328
b) $34,840
c) $48,000
d) $38,328

20) A company has a cost of capital of 10% per annum and uses two methods (NPV and IRR)
to assess investment projects. A project under consideration has a positive net value of
$72,000 and an internal rate of return of 13%. Based on the above information, which of the
following is correct?
a) The initial cost of the investment will be small
b) The project will have a short payback period
c) The cost of capital will become more expensive in the future
d) The project meets the requirement set by both methods of assessment

21) Interest is applied every three months. The nominal annual rate is 16%. What is the
effective annual rate of interest?
a) 16.99%
b) 15.84%
c) 18.56%
d) 18.10%

22) The internal rate of return is the interest rate that equates the present value of expected
future net cash receipts to:
a) The depreciation value of the investment

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b) The terminal (compounded) value of future cash receipts.

c) Zero.
d) The initial cost of the investment outlay.

23) Which of the following timing conventions are used in the DCF appraisal of capital
investment projects?
a) A cash flow that occurs during the course of a time period is assumed to occur at the start of that
period.
b) A cash flow that occurs during the course of a time period is assumed to occur at the end of that
period.
c) A cash outlay incurred at the start of the project is assumed to occur in year 1.
d) A cash flow that occurs at the start of a time period is taken to occur at the end of the previous
period.

24) Which of the following methods of investment appraisal is based on accounting profits?
a) ARR.
b) IRR.
c) Payback.
d) NPV.

25) A company is considering whether to invest in a project that would involve the purchase
of equipment costing $300,000. The project would have a six-year life, at the end of
which the equipment would have an expected residual value of $60,000. Depreciation
would be charged using the straight-line method, over the six-year period. The company
has spent $30,000 on a report by a team of consultants, who have prepared the following
estimates of the annual profit for each year of the project.

Year 1 2 3 4 5 6
Profit (in $000) 60 75 100 60 40 20
What is the payback period for the project, to the nearest month?
a) 2 years 10 months
b) 4 years 2 months
c) 4 years 11 months
d) 2 yeas 7 months

26) Fast pac plc has estimated the following cash flows for a new project;
Year 1 Year 2 Year 3 Year 4
$000 $000 $000 $000
Plant & Machinery (850) 100
Net Operating Cash Flows 180 270 390 320
In addition, a share of existing overheads is to be allocated to the project, amounting to $60,000 per
annum Calculate the accounting rate of return (ARR) for this project, using the following formula:
ARR = average annual profits/average investment.
(Put your answer as a percentage eg enter 30 for 30%)
The accounting rate of return is
Ans : _______________________

27) JAH Company is about to invest $400,000 in machinery and other capital equipment for
a new product venture. Cash flows for the first three years are estimated as follows;

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Year $000
1 210
2 240
3 320
JAH Company requires a 17% return for projects of this type. What is the NPV of this venture?
a) -$154,670
b) $45,010
c) $220,450
d) $154,670

28) The following statements relate to relevant cost concepts in decision making;
1. Materials can never have an opportunity cost whereas labor can
2. The annual depreciation charge is not a relevant cost
3. Fixed costs would have a relevant cost element if a decision causes a change in their total
expenditure
Which statements are correct?
a) 1 & 2
b) 1 & 3
c) 2 & 3
d) 1, 2 & 3

29) B Company is deciding whether to launch a new product. The initial outlay for the
product is $60,000. The forecast possible annual cash inflows and their associated
probabilities are shown below;
Year 0 (60,000)
Year 1 23,350
Year 2 29,100
Year 3 27,800
The company’s cost of capital is 8% per annum. Assume the cash inflows are received at the end of the
year and that the cash inflows for each year are independent. The expected net present value for
the product is;
a) ($500)
b) $8,634
c) $10,189
d) $12,348

30) The following measures have been calculated to appraise a proposed project.
The internal rate of return is 12%
The return on capital employed is 16%
The payback period is 4 years
Which of the following statements is correct?
a) The payback is less than 5 years so the project should go ahead
b) The IRR is lower than the return on capital employed so the project should not go ahead
c) The IRR is greater than the cost of capital so the project should go ahead
d) The IRR is positive so the project should go ahead

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