Welcome to your INVESTMENT APPRAISALS

01. An asset is bought for a project at a cost of $25,000 and will be used for four years before being disposed of for $5,000. Tax-allowable depreciation is available at 25% reducing balance, and the corporation tax rate is 30%.

What is the balancing allowance (or balancing charge) to be received in the year of disposal of the asset by the company?

02. Details for the following project have been communicated:

Year

Cash flow

 

$000

0

(3,100)

1

1,000

2

900

3

800

4

500

5

500

Calculate the payback period in years and months : ___________years and _______months.

03. A project requires an initial investment of $800,000 and then earns net cash inflows as follows:

Year

1

2

3

4

5

6

7

Cash inflows ($000)

100

200

400

400

300

200

150

In addition, at the end of the seven-year project, the assets initially purchased will be sold for $100,000.

What is the project’s accounting rate of return using the average capital invested method?

04. A company is currently evaluating a project which requires an investment of $12,000 now, and $4,800 at the end of Year 1. The cash inflow from the project will be $16,800 at the end of Year 2 and $14,400 at the end of Year 3. The cost of capital is 15%.

What are the discounted payback period (DPP) and the net present value (NPV) of the project?

05. Adonis Ltd wishes to undertake a project requiring an investment of $732,000, which will generate equal annual inflows of $146,400 in perpetuity.

If the first inflow from the investment is a year after the initial investment, what is the IRR of the project?

06. When discussing the internal rate of return (IRR) and net present value (NPV) techniques, which of the following statements is not true?
07. Moonfire Ltd is considering investing in a two-year project. The initial investment in machinery and set-up costs will be $360,000 payable immediately. In addition, working capital of $24,000 is required at the beginning of the contract which will be released at the end of the two years. Moonfire has a cost of capital of 15%.

In order to make the project financially viable, what is the minimum acceptable contract price to be received at the end of the contract?

08. Bishop plc needs to replace a major item of capital equipment in three years' time. The estimated replacement cost will be $500,000. Funds for the replacement are to be provided by setting aside four equal annual sums and investing them at 10% pa. The first amount will be invested immediately, the last in three years' time.

What is the annual amount that Bishop should set aside?

09. Which of the following statements is false for a project with conventional cashflows of outflows followed by inflows?
10. A company is appraising two projects. Project X has a positive NPV at a zero discount rate and project Y has a negative NPV. Project X has two internal rates of return of 12% and 27%. Project Y has two internal rates of return of 9% and 18%. The company's cost of capital is 20%.

Which is the correct combination of decisions concerning projects X and Y?

11. Farmer plc is considering purchasing a Big Bud 747 tractor, at a cost of $330,000. The management of Farmer plc estimate that the investment will produce an annual saving in operating costs of $80,000 for seven years.

If the purchase goes ahead on 1 January 2019 and the savings are receivable from 31 December 2019 to 31 December 2020, what is the internal rate of return of the investment?

12. A 3-year project has a required rate of return of 12% and has the following forecast cash costs:

Year

Cash cost

1

$100,000

2

$200,000

3

$240,000

 

What is the project’s equivalent annual cost?

13. Dazza Ltd makes only one product and has communicated the following: Fixed costs $384,000 Variable cost per unit $7.84 Profit $24,000

Dazza has established that a 3% increase in selling price would not alter the number of units sold each period and the profit would increase by $24,000.

What is the current selling price per unit?

14. The following information is given about a company:

Fixed costs

$160,000

Variable costs

$4 per unit

Net profit

$10,000

A 2% increase in selling price will leave the number of units sold unchanged, but will increase profits by $5,000.

What is the present selling price per unit?