Question

A company has three factories in different locations. The disposal values of the factories are zero. The following information has been provided for each factory:

Factory                                                   A                  B                     C

                                                              £m                £m                £m

Initial investment                                    40                 70                     100

Operating profit of factories before depreciation per annum:

Year 1                                                    20                 20                     60

Year 2                                                    20                 20                     20

Year 3                                                    2                   20                     10

Year 4                                                    0                   37                   15

Depreciation is based on the straight-line method.

The cost of capital is 10%.

Discount factors are as follows:

                                         Year 1:          0.909

                                         Year 2:          0.826

                                         Year 3:          0.751

                                         Year 4:          0.683

                              

                  

1. Calculate the Net Present Value for factory B and choose the nearest value from the following options:

1. £ 85m
2. £ 5m
3. £ 35m
4. £ 1m

2. Which factory has the shortest payback period?

1. A
2. B
3. C
4. Both B and C

3. Which factory has negative net present value?

1. A
2. B
3. C
4. A and C

4. Using a discount rate of 15%, the Net Present Value of factory B is negative. Which of the followings about the internal rate of return (IRR) for factory B is correct?

1.     Higher than 15%
2.     Higher than 20%
3.     Lower than 15%
4.     Equal to 10%

18.     In which of the following cases does a company need to use investment appraisal techniques?

1. Deciding on buying a new branch
2. Predicting costs for the next financial year
3. Preparing the budget
4. Predicting the return on investments for the next year

19.    Which investment appraisal technique ignores some parts of cash flows?

1. Accounting Rate of Return
2. Net Present Value
3. Payback Period
4. Internal Rate of Return

20.    According to the net present value method of investment appraisal, a project should be accepted when:

1.      Net present value is negative
2.      Net present value is positive
3.      Net present value is higher than total annual profit
4.      Net present value is lower than total annual profit

Answer 1

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