Welcome to your ML 301 - Practice Question 2 Question 1A piece of machinery cost Rs.500,000 paid at the start of the project. Tax allowable depreciation is available at rate of 25% per year reducing balance. Taxation is 30%, with no delay in the payment of tax. Which figure should be entered into the NPV calculation relating to tax saving in year two of asset’s life?1. Rs.28,1252. Rs.(93,750)3. Rs.37,5004. Rs.93,750 Question 2Which of the following are relevant costs for an investment appraisal project?(Select all that apply ) 1. Accounting conventions 2. Historical costs 3. Committed costs 4. Estimated cash costs Question 3Which of the following is not a form of hard capital rationing1. The directors make a decision that investment can only come from retained profits2. A high gearing ratio deters lenders from lending further3. The bank restricts lending based on a breach of the overdraft limit4. The company has been recently established and therefore lacks a credit history which means they cannot obtain credit Question 4Zaxi company have three potential investment projects, which are indivisible. They have Rs.350,000 to invest in total.Enter the value of the maximum NPV that they can achieve Question 5The above projects have been identified as being suitable investments for ABCD Co..They have a maximum of Rs. 1 million to invest this year.Projects A and C are incompatible in any combination or proportion. Select the best combination of project from the options below.1. Project B, Project C and 50% of Project D2. Project A , Project B and Project C3. Project A , Project B and 75% of Project D4. Project B , Project D and 50% of Project A Question 6Identify the type of the real options described below: Investment in a new piece of machinery costs Rs. 5 million and is part of an 8 year project. The machine manufacturer will allow the machinery to be returned anytime up to 4 years into the project and will refund 50% of the cost price less depreciation.Please select your answerOption to abandonOption to delay The company Q have exclusive rights to a piece of foreign land for the next 5 years. The land is intended for a new factory site. They decide to wait for the exchange rate to stabilise before commencing build.Please select your answerOption to abandonOption to delay Question 7Which of the following is not a qualitative factor when appraising an investment opportunity ?1. Net present value2. Quality of output3. Environmental concerns4. Ethical considerations Question 8 Based on the projected cash flows above , which variable is the most sensitive in this project ? 1. Purchase cost2. Savings3. Running expenses Question 9R Co. wishes to invest in a four year project which has a positive NPV of Rs.450,000 (based on a cost of capital of 11%) The net inflows from the project are Rs.350,000 every year for each of the four years. Ignore tax and inflation. Enter the % decrease (to the nearest 0.1%) that would be required to cause this project to be financially unviable from an NPV perspective Question 10Zaza co uses expected values to reflect risk levels within investment appraisals. The NPV that results from the project could be Rs.2100, Rs.3400 or Rs.4100. The probabilities of each are 35% , 40% and 25% respectively. What is the expected value of this project?1. Rs. 1,3602. Rs. 9,6003. Rs. 3,2104. Rs. 3,120 Question 11Which of the following is not a weakness of sensitivity analysis?1. Its results do not provide management with a decision rule2. It gives no probability of likelihood of each variable changing3. It identifies crucial variables, which must be monitored closely4. It can only deal with changes in variables in isolation. Question 12A company’s selling price is Rs. 10 per unit and operating variable cost is Rs. 4/ per unit. If it’s operating Fixed cost is Rs. 20000/- and the current volume is 10000 units, what is it’s operating leverage What is the new PBIT when volume drops by 20% Question 13A company’s selling price is Rs. 10 per unit and operating variable cost is Rs. 4/ per unit. If it’s operating Fixed cost is Rs. 20000/- and the current volume is 10000 units, what is it’s operating leverage Interest cost of the company is Rs. 10000 How much is the financial leverage? Question 14A company’s selling price is Rs. 10 per unit and operating variable cost is Rs. 4/ per unit. If it’s operating Fixed cost is Rs. 20000/- and the current volume is 10000 units, what is it’s operating leverage Interest cost of the company is Rs. 10000 How much is the combined leverage? Question 15How much is the PBT when volume drops by 20%? Question 16An ice – cream seller needs to decide how many ice – creams to order in advance of his working day. The numbers sold are strongly linked to the weather conditions which is uncertain. The table below gives the profits relating to each possible outcome: The probabilities of weather for the period are :Cold weather : 0.3Warm weather : 0.5Hot weather : 0.2 If the seller applies the expected value rule , what size order should be placed ?1. 100 units2. 500 units3. 300 unit Question 17A decision maker using the ‘Expected Value’ criterion would be described as:1. Risk averse2. Risk neutral3. Risk seeking Question 18A potential capital investment project is calculated as having an NPV of Rs.30,000. This includes fixed costs relating to the project , which have a PV of Rs.150,000. Which of the following statements are correct ?(Select all that apply ) 1. Fixed costs represent a department variable in this scenario 2. Sensitivity analysis shows fixed costs sensitivity as 7.5% 3. If PV of fixed costs falls by 20 % then this project in no longer viable 4. Fixed costs are likely to be an independent variable in this scenario 5. Sensitivity analysis shows fixed costs sensitivity as 20% Question 19A solicitor is appraising a civil case.He tells his client that going to court will incur costs of Rs.5000 upfront. There has been an offer received from the other party who will settle out of court today and pay a sum of Rs.12,000. Going to court and winning the case will result in estimated compensation of Rs.35,000 before costs. Losing in court means no compensations will be received. The solicitor believes there is a 40% chance that the court case will be unsuccessful. Using the expected value technique , advise the client on the best course of action.1. Do not go to court and receive an expected net Rs.12,0002. Go to court and receive an expected net Rs. 16,0003. Go to court and receive an expected net Rs.12,0004. Go to court and receive an expected net Rs.21,000 Question 20Which of the following is/ are true regarding the use of perfect knowledge in decision – making scenarios?(Select all that apply ) 1. When perfect knowledge is adjusted to show that predictions are only correct some of the time – this describes imperfect knowledge 2. The maximum price that a decision maker should pay to obtain perfect knowledge should be equal to the expected value that will result from having the perfect knowledge 3. Perfect knowledge is only a theoretical assumption – uncertain outcomes can not be forecast with 100% certainty Time is Up!Time's up