# Investment Appraisal

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ACCA F9 PAPER

• 1.

### A machine which cost \$20,000 was sold after 5 years for \$5,000 and by this time tax allowable depreciation of \$17,000 had been claimed. Rate of tax is 30%. What is the cash flow arising as a result of tax implications on the sale of the machine?

• A.

\$600 Inflow

• B.

\$600 Outlow

• C.

C \$2,000 Outflow

• D.

\$2,000 Inflow

B. \$600 Outlow
Explanation
The cash flow arising as a result of tax implications on the sale of the machine is \$600 Outflow. This is because the machine was sold for \$5,000, which is \$15,000 less than its original cost of \$20,000. The tax allowable depreciation of \$17,000 had already been claimed, so the remaining \$3,000 (\$20,000 - \$17,000) is considered a taxable gain. With a tax rate of 30%, the tax liability on this gain is \$900 (\$3,000 * 0.30). Therefore, the cash flow is a decrease of \$900, resulting in an outflow of \$600 (\$900 - \$3000).

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• 2.

• A.

Option 1

• B.

Option 2

• C.

Option 3

• D.

Option 4

A. Option 1
• 3.

### The IRR method ignores the relative size of investments, True or False?

• A.

True

• B.

False

A. True
Explanation
The IRR method, or internal rate of return method, calculates the rate at which the net present value of an investment becomes zero. It does not take into consideration the relative size of investments. Therefore, the statement that the IRR method ignores the relative size of investments is true.

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• 4.

### Which ONE of the following is included in the cash flows when setermining the net present value of a project?

• A.

Depreciation charges for the equipment

• B.

Research costs

• C.

Disposals value of the equipment

• D.

Interest payments

C. Disposals value of the equipment
Explanation
The disposal value of the equipment is included in the cash flows when determining the net present value of a project. The disposal value represents the amount of money that will be received from selling the equipment at the end of its useful life. It is considered as a cash inflow and is included in the calculation of the net present value to determine the profitability of the project.

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• 5.

### Using a cost of capital of 9%, the NPV of a project turned out to be \$4,300. Using a rate of 12%, the NPV of the project is (\$2,230). What is the IRR of the projects?

• A.

13.97%

• B.

15.23%

• C.

10.97%

• D.

10%

C. 10.97%
Explanation
The IRR (Internal Rate of Return) is the discount rate that makes the NPV (Net Present Value) of a project equal to zero. In this case, the NPV of the project is positive (\$4,300) when using a cost of capital of 9%, and negative (\$2,230) when using a rate of 12%. The IRR can be calculated by finding the discount rate that would make the NPV equal to zero. Since the NPV is positive at 9% and negative at 12%, the IRR must be between these two rates. The answer of 10.97% falls within this range and is the correct IRR for the project.

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• 6.

### A company is considering a project which will earn cash flows of \$60,000 in Year 1 and \$80,000 in Year 2 but will require capital investment of \$100,000 today. What is the NPV of the project if the cost of capital is 15%?

• A.

\$112,665

• B.

\$12,665

• C.

\$21,739

• D.

\$5,860

B. \$12,665
Explanation
The NPV (Net Present Value) of a project is calculated by subtracting the initial investment from the present value of the cash flows. In this case, the cash flows are \$60,000 in Year 1 and \$80,000 in Year 2, and the cost of capital is 15%. By discounting the cash flows back to the present value using the cost of capital, we find that the present value of the cash flows is \$52,173 for Year 1 and \$59,492 for Year 2. Subtracting the initial investment of \$100,000 from the present value of the cash flows gives us an NPV of \$12,665.

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• 7.

### The rate of return is 12%. Cash inflow in the second year is \$50,000 and in the third year \$40,000. What is the present value of these future returns?

• A.

\$11,388

• B.

\$118,917

• C.

\$71,375

• D.

\$68,330

D. \$68,330
Explanation
The present value of future returns can be calculated using the formula PV = CF / (1+r)^n, where PV is the present value, CF is the cash flow, r is the rate of return, and n is the number of years. In this case, the cash inflow in the second year is \$50,000 and in the third year is \$40,000. The rate of return is 12%. Plugging in these values into the formula, we get PV = 50000 / (1+0.12)^2 + 40000 / (1+0.12)^3 = \$68,330.

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• 8.

### The Fisher formula is : (1+i)=(1+_r)(1+h). What does the letter ‘h’ stand for in this formula?

• A.

Real rate of interest

• B.

Rate of inflation

• C.

Nominal rate of interest

• D.

Money rate of interest

B. Rate of inflation
Explanation
The letter 'h' in the Fisher formula represents the rate of inflation. The formula is used to calculate the nominal interest rate, where (1+i) is the nominal rate, (1+r) is the real rate, and (1+h) is the rate of inflation. By incorporating the rate of inflation, the Fisher formula helps to determine the true purchasing power of money and adjust for changes in prices over time.

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• 9.

### If the cash flows are expressed in terms of the actual number of dollars that will be received or paid on the futures dates, we use the real rate for discounting. True or False

• A.

True

• B.

False

B. False
Explanation
If the cash flows are expressed in terms of the actual number of dollars that will be received or paid on the futures dates, we do not use the real rate for discounting. Instead, we use the nominal rate for discounting.

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• 10.

### Where there are conventional cash flows IRRs are possible, True or False

• A.

True

• B.

False

B. False
Explanation
The statement "Where there are conventional cash flows IRRs are possible" is false. IRR (Internal Rate of Return) is a financial metric used to evaluate the profitability of an investment. It calculates the rate of return at which the net present value of cash inflows equals the net present value of cash outflows. However, IRR is not possible when there are conventional cash flows. Conventional cash flows refer to a series of cash inflows followed by a single cash outflow or vice versa. In such cases, the IRR cannot be calculated as there are multiple discount rates at which the net present value is zero.

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• 11.

### A cash outlay or receipt that occurs at the beginning of the time period is taken to occur at:

• A.

The start of this year

• B.

The end of this year

• C.

The end of last year

• D.

Year 0

C. The end of last year
Explanation
A cash outlay or receipt that occurs at the beginning of the time period is taken to occur at the end of last year because the question states that it happens at the beginning of the time period. Therefore, it would be logical to assume that it occurred at the end of the previous year, as the beginning of the current year has not yet occurred.

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• 12.

### A company is considering the following project. Cost of asset:\$100,000, Estimated life:4 years and Profit before depreciation is \$125,000 over the 4 years. Capital asset is depreciated by 25% of its cost each year. What is the ROCE (based on average investment)?

• A.

15%

• B.

12%

• C.

13%

• D.

12.5%

D. 12.5%
Explanation
The Return on Capital Employed (ROCE) is a measure of the profitability of a company's capital investments. It is calculated by dividing the profit before depreciation by the average investment. In this case, the profit before depreciation over the 4 years is \$125,000. The average investment can be calculated by taking the initial cost of the asset (\$100,000) and dividing it by 2, since the asset is depreciated by 25% each year. Therefore, the average investment is \$50,000. Dividing the profit before depreciation by the average investment gives a ROCE of 12.5%.

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• 13.

### ABC Ltd requires a return of 3% per year. ABC Ltd is located in a country where inflation is expected to be 8% per annum. What nominal rate of return is required by ABC Ltd to get a real return of 3%?

• A.

11.24%

• B.

4.85%

• C.

4.63%

• D.

10.24%

A. 11.24%
Explanation
To calculate the nominal rate of return required by ABC Ltd to achieve a real return of 3%, we need to add the inflation rate to the desired real return. In this case, the inflation rate is 8% and the desired real return is 3%. Therefore, the nominal rate of return required would be 11.24% (8% + 3% = 11%). This means that ABC Ltd needs to earn an 11.24% return in order to maintain a real return of 3% after accounting for inflation.

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• 14.

### Which one do you like?

• A.

Option 1

• B.

Option 2

• C.

Option 3

• D.

Option 4

A. Option 1
Explanation
The given question asks for the preference of the respondent. The correct answer is "Option 1" because it implies that the respondent likes the first option out of the given choices.

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• 15.

### What is the present value of \$100,000 cash inflows per annum in perpetuity when the organisation’s cost of capital is 15%?

• A.

\$714,286

• B.

\$666,666

• C.

\$86,957

• D.

\$625,000

B. \$666,666
Explanation
The present value of cash inflows per annum in perpetuity can be calculated using the formula PV = CF / r, where PV is the present value, CF is the cash inflow per annum, and r is the discount rate. In this case, the cash inflow is \$100,000 per annum and the discount rate is 15%. Plugging these values into the formula, we get PV = \$100,000 / 0.15 = \$666,666. Therefore, the correct answer is \$666,666.

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• 16.

### A machine has annual running costs of \$50,000 and is producing output which is selling for \$20,000, If this machine is now diverted to produce a special order worth \$30,000, what would be the relevant cost?

• A.

\$80,000

• B.

\$50,000

• C.

20,000

• D.

\$30,000

C. 20,000
Explanation
The relevant cost in this scenario would be \$20,000. This is because the relevant cost is the cost that is directly affected by the decision being made. In this case, the decision is to divert the machine to produce a special order worth \$30,000. The annual running costs of \$50,000 are not directly affected by this decision, as they would still be incurred regardless of whether the machine produces the special order or not. The selling price of the output, which is \$20,000, is the relevant cost because it represents the revenue that would be generated from the special order.

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• 17.

### Revenue expenditure may be incurred to maintain the earning capacity of existing non-current assets, True or False?

• A.

True

• B.

False

A. True
Explanation
Revenue expenditure refers to the expenses incurred by a company to maintain or enhance the earning capacity of its existing non-current assets. This includes regular repairs, maintenance, and servicing costs. Therefore, the statement that revenue expenditure may be incurred to maintain the earning capacity of existing non-current assets is true.

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