QUESTION: 125

YHJ is considering an investment in a project that will cost $20 million. Annual fixed costs will be $12 million per year, excluding depreciation. Annual sales are forecast at 5 million units, with a contribution per unit of $8. After five years the equipment will be worn out and YHJ will have to spend $50 million on disposal costs. The discount rate is 10%. Calculate the sensitivity of the net present value of this project to a 20% increase in the disposal costs.

Answer(s): A

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QUESTION: 126

B is a company with a strong risk appetite.
Which of the following are benefits of using the certainty equivalent method of capital investment appraisal in B's case?

A high level of subjective judgment is required from the decision maker.
It avoids the need for the investor to estimate an appropriate discount rate which reflects the risk of the project cash flows.
By building a risk adjustment into the discount rate, it takes greater account of risk in later time periods.
More risky projects are more likely to be accepted using this method of appraisal.
The method produces the most appropriate results in cases where project cash flows do not increase in risk over time.

Answer(s): B,C

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QUESTION: 127

K has several subsidiary companies. The directors of K's subsidiaries are paid an annual bonus based upon their particular subsidiary's reported profits. The directors of one of K's subsidiaries are considering the choice between two models of a machine.
Which of the following is most likely to explain the decision to choose model X over model Y?

Model X has a better combination of investment and running costs.
Model X is the less risky investment.
Investing in model X will mean the subsidiary will show a higher profit.
Investing in model X will lead to a higher share price.

Answer(s): C

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QUESTION: 128

There are many method for appraising capital projects.
Select ALL correct statements.

The time value of money should be the same for all similar competing projects.
Decisions should only consider the financial implications of the project.
No one method of capital appraisal taken alone is adequate to evaluate competing projects.
Net Present Value evaluation considers a range of different discount rates considering different risk factors and finance methods.
Opportunity cost is only relevant when capital is scarce.
All projects should be evaluated using sensitivity analysis.

Answer(s): A,C,D

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QUESTION: 125

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QUESTION: 128