QUESTION: 129

RFD, a listed company, is considering making an investment in a risky new venture. RFD has a substantial cash surplus that will be used to acquire the necessary resources. It is unlikely that RFD would have been able to raise finance for this investment because the company is already highly geared.

Which of the following statements about stakeholders' conflicting interests are true?

RFD's shareholders are exposed to the systematic risk from this project and the directors are exposed to total risk.
RFD's lenders are likely to suffer a greater risk than RFD's equity investors.
Neither RFD's shareholders or lenders are likely to have the means to prevent the directors from making this investment.
RFD's existing employees are likely to enjoy a significant upside risk from this project.
The diversification of RFD's interests will reduce the risks for all stakeholders.

Answer(s): A,B,C

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QUESTION: 130

A project has been evaluated on the basis that it will cost $14 million and will have a net present value of $2.3 million.
The project has commenced and $3 million of the initial $14 million has been invested. A problem has been discovered that will cost an additional $2.5 million to rectify. The $2.5 million will be payable immediately.
What is the NPV of continuing with this project?

-$3 million
-$0.2 million
$1.8 million
$2.8 million

Answer(s): D

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QUESTION: 131

B, a construction company, has a policy of carrying out a post completion audit on every construction project undertaken where the value exceeds $1 million.
What is the role of the post completion audit?

To reward staff and celebrate success.
To signify the end of the project.
To highlight what can be done to improve similar future projects.
To apportion blame for things not done well.

Answer(s): C

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QUESTION: 132

Having carried out a full capital appraisal for a construction project, H Company has approved the project with initial outflows of $6,000,000 and a net present value of $1,200,000. The implementation phase has been commenced with 25% of the costs already committed. However when the ground was opened, an underground waterway was revealed which will need to be diverted if the project is to proceed. Work to carry out this diversion has been estimated at $1,300,000.
Which of the following factors will define whether the project should go ahead or not?

The project actually has a higher NPV than before.
The project now has a negative NPV.
Abandoning the project will have an adverse effect on shareholder confidence.
There will be abandonment costs to restore the site.
There may be other unexpected costs to be met if the project continues.

Answer(s): A,D

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QUESTION: 129

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QUESTION: 131

QUESTION: 132