Investment Appraisal

1. $5,000 is invested at the start of year 1 and simple interest is added each year at 8% per
annum.
What will be the total value of the investments at the end of Year 3?

A. $5,800
B. $5,832
C. $6,200
D. $6,299

2. $6,000 is invested at the start of year 1 and compound interest. At the end of year 2 the
investment is valued at $7,440. What is the simple interest rate/ annum?
_______________%

3. $8,000 is invested at the start of year 1 and compound interest is added each year at
10% per annum. At the end of year 2, $1,000 is withdrawn from the investment.
$_______________

4. $50,000 is invested at the start of year 1 and compound interest is added each year at
9% per annum.
Calculate the value of the investment at the end of Year 3 (to the nearest whole number)
$________________

5. $12,000 is invested at the start of year 1 and compound interest is added each year at
8% per annum. At the end of year 2, $3,000 is withdrawn from the investment. The
interest rate is unchanged. What is the total value of the investment at the end of year 4
(to the nearest whole number)?

6. $15,000 is invested at the start of year 1 and earns compound interest. At the end of
year 2 the investment is valued at $17,496. What is the compound interest rate/annum?
__________________%

7. An investment is worth $8.354 at the end of 4 year having earned compound interest of
8% per annum.
What was the value of the original investment (to the nearest whole number)?
$__________________

8. What is the present value of $100,000 at the end of year 4 if an interest rate of 8% per
annum applies (to the nearest whole number)?
$___________________

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9. A company is reviewing two alternative investment opportunities both of which would
begin now, in January year 0. Cash flows for each investment would be as follows:

Investment 1 Investment 2
Jan year Cash flow Jan year Cash flow
0 $(10,000) 0 $(20,000)
1 $12,000 1 $23,000

The interest rate is 10%

Is the following statement true or false:

The company should chose investment 1 as it results in a higher net present value.
True
False

10. How much needs to be invested now if a company requires a cash flow of $50,000 at the
end of 3 years. The current interest rate is 10% per annum (to the nearest whole
number)
$_________________

11. A company is evaluating a project with the following cash flows over a 4 year period.

Year Cash flows

0 $(30,000)
1 $15,000
2 $18,000
3 $20,000

What is the net present value of the project if a discount rate of 10% applies?
$________________

12. A company is considering an investment with a net present value of 12,510. Cash flows
for the investment are as follows:

Year Cash flows

0 $(15,000)
1 $30,000

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The current discount rate is __________________%

13. The following graph is available for a particular project:

Which of the following statements is correct with regard to the above graph?

i. The NPV at 20% is positive

ii. The IRR is 12%
iii. The NPV at 8% is positive

A. (i) and (ii) only

B. (i) and (iii) only
C. (ii) and (iii) only
D. (i), (ii) and (iii)

14. A project has an NPV of $350 when the interest rate is 10%. The NPV decreases to $300
when the interest rate is 12%.

The IRR of the project is _________________%

15. The following information is available for an investment:

Discount Factor NPV of investment

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10% $5,000
14% $8,000

The IRR of the project is (to the nearest whole number) ___________________%

16. An investment requires an initial outlay of $14,000 now. Returns are expected to be
$5,000 per annum for 5 years, beginning at the end of the current year. The current
discount rate is 12%

What is the NPV of the investment?

$________________

17. A particular project requires an initial cash outflow of $60,000. 2 year from now, there
will be a cash inflow of $20,000, with an inflow of the same amount each year after that
for 5 years.

What is the NPV of the project if the discount rate is 10% (to the nearest whole
number)?
$______________

18. An individual has the option of receiving $10,000 now or an annual amount forever
starting now (i.e. perpetuity starting now). The interest rate is 10% per annum.

What would be the value of the annual perpetuity to the nearest $?

$_________________

19. A company expects to receive $5,000 each year in perpetuity. What is the present value
of the perpetuity if it starts in 2 years’ time and the discount rate is 8%?
$___________________

20. A company expects to receive $3,000 each year in perpetuity. What is the present value
of the perpetuity if the current discount rate is 9% (to the nearest whole number)?
$____________________

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21. A project has the following cash flows over the next 6 years:

Year Cash flows

0 $(75,000)
1 $20,000
2 $20,000
3 $20,000
4 $20,000
5 $20,000
What is the NPV of the project if the discount rate is 10% (annuity tables should be used to
calculate)?

$_______________

22. A project with an initial investment of $150,000 will earn revenues of $45,000 per
annum. What is the payback period of the project (to one decimal place)?
_____________years

23. An investment has a payback period for 5 years and an initial investment of $120,000.
What is the annual cash inflow of the investment?
$__________________

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24. Camden has three divisions. Information for the year ended 30 September is as follows:

Division A Division B Division C Total

$’000 $’000 $’000 $’000
Sales 350 420 150 920
Variable costs 280 210 120 610
Contribution 70 210 30 310
Fixed costs 262.5
Net profit 47.5

General fixed overheads are allocated to each division on the basis of sales revenue; 60% of
the total fixed costs incurred by the company are specific to each division being split equally
between them.

Using relevant costing techniques, which divisions should remain open if Camden wishes to
maximise profits?

A. A, B and C.
B. A and B only.
C. B only.
D. B and C only.

25. A company has just purchased a new machine, costing $150,000, for a contract. It has an
installation cost of $25,000 and is expected to have a scrap value of $10,000 in five years’
time. The machine will be depreciated on a straight line basis over five years.

What is the relevant cost of the machine for the contract?

A. $140,000.
B. $150,000.
C. $165,000.
D. $175,000.

26. A company is evaluating a project that requires two types of material (T and V). Data
relating to the material requirements are as follows:

Material type T V

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Quantity for project kg 500 400
Quantity currently in stock kg 100 200
Original cost of quantity in stock $/kg 40 55
Current purchase price $/kg 45 52
Current resale price $/kg 40

Material T is regularly used by the company in normal production. Material V is no

longer in use by the company and has no alternative use within the business.

What is the total relevant cost of materials for the project?

A. $40,400.
B. $40,900.
C. $43,400.
D. $43,900.

27. A machine owned by a company has been idle for some months but could now be used
on a one year contract which is under consideration. The net book value of the machine
is $1,000. If not used on this contract, the machine could be sold now for a net amount
of $1,200. After use on the contract, the machine would have no saleable value and the
cost of disposing if it one year’s time would be $800.

What is the total relevant cost of the machine to the contract?

A. $400.
B. $800.
C. $1,200.
D. $2,000.

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