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Free P1 Management Accounting Exam Braindumps (page: 15)

Page 14 of 66
PDF with 260 Questions

Explain how probability analysis could be used to assess the risk of the evaluated projects.

Select all the true statements.

  1. The company can determine a range of possible outcomes for each of the cash flows in the project, for example, a high, low and medium estimate of each cash flow could be determined.
  2. The net present value (NPV) of the project, if all high, low or medium estimates occurred, can be calculated along with the combined probabilities of their occurrence.
  3. The probabilities can be combined to calculate the expected value of each cash flow element and of the project as a whole
  4. The NPVs of a sample range of possible outcomes and the probability of each NPV can be calculated. If a small sample is taken the distribution of outcomes can be used to calculate the zero activities deviation of the NPVs and the probability of success of the projects.

Answer(s): A,B,C



Which of the following is a definition of a rolling budget?

  1. A budget that is continuously updated by adding a further accounting period (month or

    quarter) when the earliest accounting period has expired.
  2. A budget that adjusts for changes in the volume of activity as they occur through the budget year.
  3. A budget that uses the current year budget as the basis for the next year budget.
  4. A budget which changes in response to uncontrollable events.

Answer(s): A



CORRECT TEXT
According to a decision tree forecasting, there are three possible outcomes of a project requiring £10,000 capital investment. They are (along with probability of occurring):
£20,000 in revenue (45%), £35,000 (15%),

£10,000 (30%) and -£6,000 (10%).

However, choosing another project (2) requiring the same investment would give us £12,000 and choosing project 3 would give us a 90% chance of generating revenues of £15,000 but a 5% chance of revenues of £0.

Project 4 is wildly ambitious and boasts an unlikely (5% chance) of generating revenues of £100,000. There is a 10% probability of negative revenues.

Which is the risk averse investor more likely to take?

  1. Project 1
  2. Project 2
  3. Project 3
  4. Project 4

Answer(s): B



N prepares budgets on an annual basis by using the budget from the previous year, and then adjusting it for growth and inflation.

This is an example of:

  1. An incremental budget
  2. A rolling budget
  3. A flexed budget
  4. Zero based budgeting

Answer(s): A






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