capital investment appraisal question

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Capital investment appraisal question

The following information relates to an investment project which is being evaluated by the directors of Fence Co, a listed company. As a matter of policy, the directors require all investment projects to be evaluated using both the payback and return on capital employed methods.

Shareholders have recently criticised the directors for using these investment appraisal methods, claiming that Fence Co ought to be using the academically-preferred net present value method. The remuneration package does not include a share option scheme. The return on capital employed method considers the time value of money B. Return on capital employed must be greater than the cost of equity if a project is to be accepted C. Riskier projects should be evaluated with longer payback periods D.

Payback period ignores the timing of cash flows within the payback period. Hebac Co is preparing to launch a new product in a new market which is outside its current business operations. Hebac Co plans to charge a lower selling price initially and then increase the selling price on the assumption that the new product will establish itself in the new market. Forecast sales volumes, selling prices and variable costs are as follows:. Question 1. The quantitative techniques used to calculate the financial costs and benefits in investments?

Gives the highest rate of return. Returns the cost of investment first. Has the highest total net cash flow. The main advantage of ARR. The greater net cash flows, the faster the payback period. It relies on discounted cash flows. Its value will fall if interest rates rise.

A financially viable investment has a positive value. Cash flows are discounted for various reasons, but NOT because of. Discounted cash flows. The selected discount factor. Impact on the environment. Payback is 3yrs 4 months. Payback is 2yrs 4months. Payback is 3yrs 8months. Payback is 3yrs 9months. Using the data in Table 3 calculate the NPV. Using the data in Table 3 calculate the Payback. Using the provided information calculate the ARR. Using the information calculate the payback.

Using the information calculate the NPV.

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Samuel adedoyin forex Ignore taxation. Print Share Edit Delete. The 9 year annuity factor less the 2 year annuity factor will leave us with the total factor for 3 to 9. Its value will fall if interest rates rise. I was expecting the calculation to have the same result. The main advantage of ARR. Did you watch my free lectures before attempting this test?
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It is estimated that the company will be able to sell whatever the machine produces. What is the payback period for the machine? Retained profits are the main source of business funds The issuing of shares to raise finance can be expensive Borrowing can increase the risk that a company faces Retained profits represent a free source of funds The Submit Answers for Grading feature requires scripting to function.

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Chapter Capital investment. Multiple Choice Questions. Capital investment appraisal refers to:. Evaluating the costs and benefits of proposed investments in operating assets. Making sure that we have enough money to buy assets.

Making sure that assets pay for themselves as soon as possible. Making sure that we have enough assets to operate. Which of the following will not be a relevant factor when using the payback method of capital investment appraisal? The total cash flows generated by the asset. The timing of the first cash inflow. The cost of the asset. The cash flows generated by the asset up to the payback period. A project would normally be undertaken if its net present value is:.

Exactly the same as the NPV of existing projects. Why is the payback method often considered inferior to discounted cash flow in capital investment appraisal? It does not take account of the time value of money. It only takes into account the future income of a project. It does not calculate how long it will take to recoup the money invested. I is more difficult to calculate.

Time 1 is one year later — the end of the first year and the start of the second year Time 2 is another year later — the end of the second year and the start of the third year and so on. This is needed at the start of the year — i. Similarly at time 3, the working capital needs to be increased to , but since there is already a total of , it is the extra that is needed — the extra is That hopefully makes sense of the rest of the figures. At time 4 the working capital needed is lower, and so there is a cash inflow of the difference, and finally at the end of the project we recover the total of all the working capital that has been invested.

This topic has 4 replies, 3 voices, and was last updated 5 years ago by John Moffat. Viewing 5 posts - 1 through 5 of 5 total. June 3, at pm Hello, Sir! Thank you in advance! The final balances it to 0.

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