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Finance Exam Prep: Mock Test 2

The document contains two mock test questions about capital budgeting techniques. The first question involves calculating NPV and IRR for two projects with initial investments and annual cash flows. The second question provides cash flow information about installing an electricity generator and calculates NPV increases from grants. It also asks to identify the definition of NPV.

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warriornikheel7
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97 views10 pages

Finance Exam Prep: Mock Test 2

The document contains two mock test questions about capital budgeting techniques. The first question involves calculating NPV and IRR for two projects with initial investments and annual cash flows. The second question provides cash flow information about installing an electricity generator and calculates NPV increases from grants. It also asks to identify the definition of NPV.

Uploaded by

warriornikheel7
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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MA MOCK TEST 2

Full Marks:
Pass Marks:

1. Two projects (A and B) are being considered. The COC is 10% per annum.

Project A requires an initial investment of $40,000, followed by net cash inflows $12,000 per year at
the end of each of the next 6 year.
Project B is also expected to have constant annual cash inflow at'the end of each of the next 6 year.
The NPV of the project discounted at a cost of Capital iS $7,840 positive. There are no other cash
flow other then an initial investment of $27,000.

Task 1: (6 marks)

1. What is the NPV of the Project AT $____________


. What is the approximate IRR of the Project A (to the nearest %)? _______%
3. What is the constant annual cash inflow of the project B? $____________

Task 2: (4 marks) , .'

The following statements are concerned with capital investment project evaIu'ation. Which techniques
are related to each statements.

IRR Payback IRR and Neither IRR


only payback nor Payback

Compare project return with the cost of capital


to determine viability

Use cash flow forecast in the evaluation

Compare project return with the return on


capital employed to determine viability
” ”/. ’
Use net profit forecasts in the evaluation

2. The ABC community is planning to install a generator to produce electricity. Debits'are as


follows.
ii)

iii. Depreciation will be calculated on straight line basis on the difference between capital cost
and the final sale value

iv. A license to operate will cost $50,000 in the first year rising by $20,000 for next two years

v. Sales of electricity will be $1,300,000 per year

vi. The ABC community rise at the rate of 10 %

Task 1: (5 marks)

Cash inflow ($) Cash outflow ($)

End of year 1

End of year 2

End“of year 3

Task 2: (3 marks)

The community has founded that it can obtain an energy efficient grant of $2.8m at the end of the
first year or a carbon saving grant of 800,000 per annum receivable annually in advance for three
years.

Calculate the increase in NPV which will result from each grant (to two decimal places)

a) Energy efficient grant $.________ m


b) Carbon saving grant $:_______ m

Task 3 and 4 (2 marks)

Which of the following describes the NPV of the project?


a) The profit the project makes Overs its life .
b) The cash surplus remaining at the end of the project *
c) The discounted value of future reporting profit
d)
The difference between the sum of discounted inflow
and outflow

SECTION B: (5*2=10 marks)


13

3. 18%

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