QUESTION: 33

Four mutually exclusive projects have been appraised as follows using net present value (NPV), internal rate of return (IRR), accounting rate of return (ARR) and payback period (PP).

Recommend which of the projects should be chosen.

Project A
Project B
Project C
Project D

Answer(s): D

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QUESTION: 34

In an inflationary environment which is the correct way of calculating net present value (NPV)?

Using nominal cash flows and a nominal discount rate.
Forecasting the cash flows including the effect of inflation and then using a real discount rate.
Using real cash flows and a nominal discount rate.
Forecasting the cash flows excluding the effect of inflation and then using a nominal discount rate.

Answer(s): A

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QUESTION: 35

A company operates a divisional structure. The manager of division D receives a bonus based on the division's annual return on capital employed (ROCE).

A minimum ROCE of 20% must be achieved to receive any bonus and thereafter the bonus increases in line with increases in ROCE.

This year division D achieved a ROCE of 24% and the divisional manager received a large bonus.

The manager is considering an investment in a new machine for next year. The incremental ROCE earned by the machine is expected to be 19% although the ROCE for the division as a whole with the machine is expected to be 22%. Without the machine, ROCE is likely to be stable at 24%.

The cost of capital for the company as a whole is 18% per year.

Which of the following statements is correct?

The manager will accept the investment because overall the division will earn a ROCE that exceeds the minimum target of 20%.
The manager will reject the investment because it will result in a lower bonus than without the investment.
The manager will accept the investment because it will earn a ROCE that is higher than the company's cost of capital.
The manager will reject the investment because it will result in the receipt of no bonus.

Answer(s): B

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QUESTION: 36

A small company currently uses an information system that was implemented several years ago and is based entirely on internal data. The company is considering replacing it with a more up to date system. It has been suggested that the new system should include the use of big data.

Which TWO of the following statements are correct?

Big data can provide a small company with useful information in the quest for competitive advantage.
Big data is concerned solely with a dramatic increase in the amount of internal data stored.
Big data can be used by a small company to identify new opportunities.
It is not possible to value the potential benefits to a small company of an improved information system.
Big data is only applicable to large companies which have substantial funds to invest in information systems.

Answer(s): A,C

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