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Jacket
Business Accounting and Finance
Tony Davies, University of Wales, Lampeter, UK
Brian Pain, University of Luton, UK
Capital investment decisions

Self-test Questions



1

'Real' investment is not
A)expenditure on fixed assets such as plant, machinery, land and buildings
B)the amount that shareholders are willing to provide for shares in a company
C)expenditure on public relations, staff training or research and development
D)the cost of development of a new product
2

Questions 2 to 6 refer to the following diagram:

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::ch13a::/sites/dl/free/0077098250/66362/ch13a.gif','popWin', 'width=506,height=163,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif">ch13a (50.0K)</a>ch13a

What is the ARR (accounting rate of return) of the project?

A)7.5%
B)10.0%
C)12.5%
D)15.0%
3

In which year does the project pay back?
A)1
B)2
C)3
D)4
4

Assuming that revenues and costs equate to cash flows, what is the NPV (net present value) of the project?
A)+ 15,000 pounds
B)- 3,135 pounds
C)+ 3,135 pounds
D)- 15,000 pounds
5

Assuming that revenues and costs equate to cash flows, what is the IRR (internal rate of return) of the project?
A)11.6%
B)18.4%
C)6.6%
D)13.4%
6

Assuming that revenues and costs equate to cash flows, in which year does the project pay back on a discounted cash flow basis?
A)1
B)2
C)3
D)4
7

The IRR (internal rate of return) method used to compare two investment projects
A)ignores the size of each of the projects
B)always provides only one IRR for each project
C)is not shown as a percentage
D)is based on accounting profits
8

Net present value (NPV) used to evaluate an investment
A)is shown as a percentage
B)does not require an estimate of the cost of capital
C)uses relevant cash flows
D)does not allow for the time value of money
9

Questions 9 and 10 refer to the following diagram:

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::ch13b::/sites/dl/free/0077098250/66362/ch13b.gif','popWin', 'width=506,height=148,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif">ch13b (50.0K)</a>ch13b

By what percentage may the initial investment increase, after which point the project ceases to be worthwhile?

A)4%
B)14%
C)24%
D)34%
10

After what percentage decrease in the yearly cash flows does the project cease to be worthwhile?
A)10.4%
B)11.4%
C)12.4%
D)13.4%






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