Chapter 15 Multiple-choice questions

. The accounting rate of return is measured as follows:

Average annual profit expressed as a percentage of the total funds invested in the project.

Average annual profit expressed as a percentage of the average funds invested in the project.

Total profits expressed as a percentage of the average funds invested in the project.

Total profits expressed as a percentage of the total funds invested in the project.

. The cash inflows and (outflows) associated with a project are as follows:

The payback period for this project would be:

2 years and 3 months.

2 years and 6 months.

3 years.

2 years.

. Natt Ltd is considering undertaking a project that would yield annual profits (after depreciation) of £68,000 for 5 years. The initial outlay of the project would be £800,000 and the project's assets would have a residual value of £50,000 at the end of the project.
What would be the accounting rate of return for this project?

16%

8.5%

8.0%

9.1%

. What is the present value of £520,000 expected to be received in three years' time, if the business concerned requires a return of 10% on sums invested? Answers are given to the nearest £'000.

£692k

£432k

£473k

£390k

. Windsor Ltd is considering a project, which will involve the following cash inflows and (out)flows:

What will be the NPV (net present value) of this project if a discount rate of 15% is used?

+£60.8k

-£60.8k

+£240k

+460.8k

. Which of the following statements concerning the NPV is not true?

The NPV technique takes account of the time value of money.

The NPV of a project is the sum of all the discounted cash flows associated with a project.

The NPV technique takes account of all the cash flows associated with a project.

If two competing projects are being considered, the one expected to yield the lowest NPV should be selected.

. Macchu Ltd is about to undertake a project and has computed the NPV of the project using a variety of discount rates:

What is the approximate IRR of this project?

20%

17.5%

15%

22.5%

. Bond Ltd is considering two possible projects but can only raise enough funds to proceed with one of them. Investment appraisal techniques have been used and the following results found:

Which of the following is the most logical interpretation of the results?

Project W should be selected as it gives the longest payback period.

Project W should be selected because it will yield the highest NPV.

Project X should be selected because it will yield the lowest NPV

The ARR is the most meaningful investment appraisal technique and hence Project W should be selected.

. Which of the following statements concerning the payback period, is not true?

The payback period is simple to calculate and understand.

The payback period measures the time that a project will take to generate enough cash flows to cover the initial investment.

The payback period ignores cash flows after the payback point has been reached.

It takes account of the time value of money.

. Bean Ltd is considering undertaking a project, which will involve an initial outlay of £300,000. The project has the following cash flows associated with it:

If a discount rate of 10% is used to calculate the NPV of the project, which of the following statements is correct? (Assume the cash flows arise at the end of each year.)

The project will yield a positive NPV of £65.5k and have a payback period of 2 years and 3 months.

The project will yield a positive NPV of £65.5k and have a payback period of 2 years and 9 months.

The project will yield a positive NPV of £365.5k and have a payback period of 2 years and 3 months.

The project will yield a positive NPV of £365.5k and have a payback period of 2 years and 9 months.

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