FM - Ch-7

A company has a cost of capital of 10%. Project A has the following present values:

Initial investment - £300,000

Cash inflows - £600,000

Cash outflows - £100,000

Required

What is the sensitivity of Project A to changes in the cash inflows (give your answer to the nearest whole percentage)?

• 33

• 36

• 50

• 26

Are the following statements true or false?

The sensitivity of a project variable can be calculated by dividing the project net present value by the present value of the cash flows relating to that project variable

• True

• False

Are the following statements true or false?

The expected net present value is the value expected to occur if an investment project with several possible outcomes is undertaken once

• True

• False

Are the following statements true or false?

The discounted payback period is the time taken for the cumulative net present value to change from negative to positive

• True

• False

Which of the following is always true about capital rationing?

The profitability index is suitable for handling multiple- period capital rationing problems if projects are divisible

• True

• False

Which of the following is always true about capital rationing?

Projects being divisible is an unrealistic assumption

A.  

B.  

• True

• False

Which of the following statements is correct?

• Tax-allowable depreciation is a relevant cash flow when evaluating borrowing to buy

  comvxred to leasing as a financing choice

• Asset replacement decisions require relevant cash flows to discounted by the after-

  tax cost Of debt

• If capital is rationed. divisible investment projects can ranked by the profitability

  index when determining the optimum investment schedule

• Government restrictions on bank lending are associated with soft capital rationing

Which of the following is potentially a benefit to the lessee if they lease as opposed to buy?

• Avoiding tax exhaustion

• A.   Attracting lease customers that may not have been otherwise possible

• Exploiting a Iow cost of capital

• Potential future scrap proceeds

A professional kitchen is attempting to choose between gas and electricity for its main heat source. Once a choice is made, the kitchen intends to keep to that source indefinitely. Each gas oven has an NPV of $50,000 over its useful life of 5 years. Each electric oven has an NPV of $68,000 over its useful life of 7 years. The cost of capital is 8%.

Which should the kitchen choose and why?

• Gas because its average NPV per year is higher than electric

• Electric because its NPV is higher than gas

• Electric because its equivalent annual benefit is higher

• Electric because it lasts longer than gas

Which TWO of the following are typically benefits of a shorter replacement cycle?

• Higher scrap value

• Better company image and efficiency

• Lower annual depreciation

• Less time to benefit from owning the asset