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Em Methods of project appraisal 55 mins

19.1 A building society adds interest monthly to investors' accounts even though interest rates are expressedin annual terms. The current rate of interest is 6% per annum.

An investor deposits $1,000 on 1 January. How much interest will have been earned by 30 June?

ABCD

$30.00$30.38$60.00$300 (2 marks)

19.2 A one-year investment yields a return of 15%. The cash returned from the investment, includingprincipal and interest, is $2,070. The interest is

ABCD

$250$270$300$310.50 (2 marks)

------------------_. ---,,--_._. __ .._ -."-.._------------_---19.3 If a single sum of $12,000 is invested at 8% per annum with interest compounded quarterly, the .

amount to which the principal will have grown by the end of year three is approximately

ABCo

$15,117$9,528$15,219$30,924 (2 marks)------------------ --_--_ .._-_. __ ..._--_,,--_

19.4 Which is worth most, at present values, assuming an annual rate of interest of 8%?

ABCD

$1,200 in exactly one year from now$1,400 in exactly two years from now$1,600 in exactly three years from now$1,800 in exactly four years from now (2 marks)

19.5 A bank offers depositors a nominal 4% pa, with interest payable quarterly. What is the effective annualrate of interest?

ABCo

1%4%1.025%4.06% (2 marks)

19.6 A project requiring an investment of $1,200 Is expected to generate returns of $400 in years 1 and 2and $350 in years 3 and 4. If the NPV = $22 at 9% and the NPV = -$4 at 10%, what is the IRR forthe project?

ABCD

9.15%9.85%10.15%10.85% (2 marks)

19.7 A sum of money was invested for 10 years at 7% per annum and is now worth $2,000. The originalamount invested (to the nearest $) was

ABCo

$1,026$1,016$3,937$14,048 (2 marks)

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19.8 House prices rise at 2% per calendar month. The annual rate of incre,Clse correct to one decimal. place Is

A8Co

24%26.8%12.7%12.2% (2 marks)

19.9 Find the present value of ten annual payments of $700, the first paid immediately and discounted at8%, giving your answer to the nearest $.

A8CD

$4,697$1,050$4,435$5,073 (2 marks)

19.10 An investor Is to receive an annuity of $19,260 for six years commencing at the end of year 1. It has apresent value of $86,400.

The rate of interest (to the nearest whole percent) is

A8CD

4%7%9%11% (2 marks)

19.11 How much should be invested now (to the nearest $) to receive $24,000 per annum in perpetuity if theannual rate of interest is 5%?

A8Co

$1,200$25,200$120,000$480,000 (2 marks)

19.12 The net present value of an investment at 12% is $24,000, and at 20% is -$8,000. What is the

internal rate of return of this investment?

A8CD

6%12%16%18%

. ' State your answer to the nearest whole percent.

(2 marks)

i_ The following data is relevant for questions 19.13 and 19.14Diamond Ltd has a payback period limit of three years and is considering investing in one of the followingprojects. Both projects require an initial investment of $800,000. Cash inflows accrue evenly throughout theyear.

Project AlphaYear Cash inflow

$1 250,0002 250,0003 400,0004 300,0005 200,0006 50,000

The company's cost of capital is 10%.

Project BetaYear Cash inflow

$1 250,0002 350,0003 400,0004 200,0005 150,0006 150,000

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A8CD

2 years and 2 months2 years and 4 months2 years and 5 months2 years and 6 months (2 marks)

19.14 What is the discounted payback period of Project Aipha?

ABCD

Between 1 and 2 yearsBetween 3 and 4 yearsBetween 4 and 5 yearsBetween 5 and 6 years (2 marks)

19.15 A capital investment project has an ,initial investment followed by c:;on,fitant,annual returns.

How is the payback period calculated?

ABCo

Initial investment + annual profitInitial investment + annual net cash inflow(Initial investment - residual value) + annual profit(Initial investment - residual value) + annual net cash inflow (2 marks) .

19.16 A machine has an investment cost of $60,000 at time O. The present values (at time 0) of the expectednet cash inflows from the machine over its useful life are:

Discount rate10%15%20%

Present value of cash inflows$64,600$58,200$52,100

What is the internal rate of return (lRR) of the machine investment?

ABCD

Below 10%Between 10% and 15%Between 15% and 20%Over 20% (2 marks)

19.17 An investment project has a positive net present value (NPV) of $7,222 when its cash flows arediscounted at the cost of capital of 10% per annum. Net cash inflows from the project are expected tobe $18,000 per annum for five years. The cumulative discount (annuity) factor for five years at 10% is3.791.

What is the investment at the start of the project?

ABCD

$61,016$68,238$75,460$82,778 (2 marks)

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19.18 The following statements relate to an investment project that has been discouf1te~ ~frates bf ~d~~;~'~::\:k'20%: . .,.,..,:.:.», .•.. ',.::

1. The discounted payback period at 10% will be longer than the discounted payback period' at20%. '

2. The discounted payback period at 20% will be longer than the discounted payback period at10%.

3. The non-discounted payback period will be longer than the discounted payback period.

4. The non-discounted payback period will be shorter than the discounted payback period.

Which of the statements are true?

ABCD

1 and 31 and 42 and 32 and 4 (2 marks)

19.19 Which of the following accurately defines the internal rate of return ORR)?

A The average annual profit from an investment expressed as a percentage of the investment sum

B The discount rate (%) at which the net present value of the cash flows from an investment is zero

C The net present value of the cash flows from an investment discounted. at the required rate ofreturn

o The rate (%) at which discounted net profits from an investment are zero (2 marks)

19.20 An investment project has the folloWing discounted cash flows ($'000):

Year Discount rate10%(90)27.324.822.520.55]'

20%(90)25.029.817.414.5

(12.3)

o1234

0%(90)3030303030

The required rate of return on investment is 10% per annum.

What is the discounted payback period of the investment project?

ABCD

Less than 3.0 years3.0 yearsBetween 3.0 years and 4.0 yearsMore than 4.0 years (2 marks)

19.21 What is the effective annual rate of interest of 2.1 % compounded every three months?

ABCD

6.43%8.40%8.67%10.87% (2 marks)

19.22 If the interest rate is 8%, what would you pay for a perpetuity of $1,500 starting in one year's time? (tothe nearest $)

ABCD

$1.620$17,130$18,750$20,370 (2 marks)

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19.23 How.muchshould be invested now (to the nearest $)<to receive $24,000 per annum in perpetuity if theannual rate of interest is 5%? ,,'

, , A $1,200B $478,800C $480,000o '$48i,20d (2 marks)

(Total = 46 marks)

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