8/10/2019 Mock Exam on Relevant Costing NPV and IRR

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1. Calculate the net present value of a project which requires an initial investment of $243,000 and it is expected to enerate a cash inflow of $!0,000 each month for 12months. "ssume that the salva e value of the project is #ero. he tar et rate of returnis 12% per annum.

2. "n initial investment on plant and machiner& of $',320 thousand is expected toenerate cash inflows of $3,411 thousand, $4,0(0 thousand, $!,'24 thousand and$2,0)! thousand at the end of first, second, third and fourth &ear respectivel&. "t theend of the fourth &ear, the machiner& will *e sold for $+00 thousand. Calculate the

present value of the investment if the discount rate is 1'%. ound &our answer tonearest thousand dollars.

3. -resent alue of /eries of $1 Cash lows annuit&

" project will cost $!0,000 and the annual net cash inflows will *e $11,'(1 for the !&ear life of the project. he compan& has an '% cost of acquirin investment capital.5se the present value ta*le a*ove and calculate the internal rate of return IRR .

a. 4%.

*. )%.c. '%.d. 10%.e. 12%.

4. -resent alue of /eries of $1 Cash lows annuit&

" compan&6s initial cash outflow for an investment project is $)',000 and theinvestment6s annual cash inflow for ! &ears is $1',000 per &ear. Calculate the net

present value of the investment project assumin the compan& has an '% hurdle rate.

a. 707 *. $3,'(4c. $(,'1)d. $22,000e. 8one of the a*ove

!. 9hich of the followin is one of the potential advanta es of the net present value8- method over the internal rate of return : method;

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a. :t is easier to compute a project6s 8- than its : *. " project6s 8- does not have to *e adjusted for ris< considerationsc. " hurdle rate is not used in the 8- methodd. 8- method relies on a sin le discount ratee. 8one of the a*ove

). -resent alue of $1

Consider the followin information for two projects

he hurdle rate is 10%. 9hich of the followin is true?

a. he present value of the operatin costs for =ear >ne, -roject ", is$ 1),'1( .

*. he present value of the acquisition cost of -roject " is $ !4,!40 .c. he present value of the cash outflow for =ear wo, -roject ?, is

$ 12,3+0 .d. he present value of the cash outflow for =ear wo, -roject ?, is

$ 3(,(23e. >nl& " and C are true.

(. -resent alue of $1

" compan& is considerin the purchase of a new refri erated deliver& truc< for $1(!,000. he compan& has a desired rate of return of '% and plans to use the truc< in operations for ! &ears, at which time it will *e replaced. @ana ement *elieves thatthe truc< will enerate annual incremental revenue, net of cost of oods sold, of $'!,000. "nnual cash operatin costs are expected to increase *& $3!,000.@ana ement plans to depreciate the asset as a ! &ear asset under @"C / 20% &ear 1, 32% &ear 2, 1+.2% &ear 3, 11.!2% &ear 4 A &ear !, !.()% in &ear ) . "ssume a30% tax rate. he net present value ta

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a. $(,34+ *. $ 3!,24!c. $4+,4()d. $(,)!2e. 8one of the a*ove

'. -resent alue of $1

" compan& is considerin the purchase of a new refri erated deliver& truc< for $1(!,000. he compan& has a desired rate of return of '% and plans to use the truc< in operations for ! &ears, at which time it will *e replaced. @ana ement *elieves thatthe truc< will enerate incremental annual net sales revenue of $'!,000 after ta

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e. epreciation percenta es for each @"C / propert& class are in pu*lished : / ta*les.

11. " deprecia*le asset cost $40,000, has a $3,000 salva e value, and is in the ! &ear @"C / propert& class life, which is depreciated under the dou*le declinin *alance

? method. 9hat is the amount of the first &ear depreciation expense under @"C /;

a. $12,'00 *. $1),000c. $14,'00d. $4,000e. $',000

12. 9hich of the followin formulas will &ield the total cash flow from the sale of adeprecia*le asset at a ain;

a. -roceeds from the sale 7 Dain x ax rate *. -roceeds from the sale x 1 7 ax ratec. -roceeds from the sale E Dain x 1 7 ax rated. -roceeds from the sale E Dain x ax ratee. -roceeds from the sale 7 DainF ax rate

13. 9hich of the followin formulas will &ield the total cash flow from the sale of adeprecia*le asset at a loss;

a. -roceeds from the sale E Goss x 1 E ax rate *. -roceeds from the sale x 1 7 ax ratec. -roceeds from the sale E Goss x 1 7 ax rated. -roceeds from the sale E Goss x ax ratee. -roceeds from the sale 7 Goss x 1E ax rate

14. -resent alue of $1

Consider the followin for each of the 3 &ear projects, usin a 10% discount rate

9hich of the projects has the lowest net present value ;

a. -roject "

*. -roject ?c. -roject C

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d. -roject e. Cannot *e determined from the information provided.

1!. Consider the followin

9hich of the followin statements is true ;

a. -roject " has the lowest profita*ilit& index. *. -roject ? has the lowest profita*ilit& index.c. -roject C has the lowest profita*ilit& index.d. -roject ? would *e ran

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DECISION MAKING/ RELEVANT COSTING1. :n the decision to replace an old machine with a new machine, which of the followin

would *e considered a relevant cost; a. he *oo< value of the old equipment. *. "morti#ation expense on the old equipment. c. he loss on the disposal of the old equipment. d. he current disposal price for the old equipment.

2. he decision to drop a product line should *e *ased on

a. the fact that the product line shows a net loss over several periods. *. the a*ilit& of the firm to eliminate some fixed costs as a result of droppin

the product. c. whether the fixed costs that can *e avoided *& droppin the product line are

less than the contri*ution mar in that will *e lost.

d. whether the fixed costs that can *e avoided *& droppin the product lineare reater than the contri*ution mar in lost.

3. o maximi#e total contri*ution mar in, a firm should

a. promote those products havin the hi hest unit contri*ution mar ins. *. promote those products havin the hi hest contri*ution mar in ratios. c. promote those products havin the hi hest contri*ution mar in per unit of a

constrained resource. d. promote those products havin the hi hest contri*ution mar ins and

contri*ution mar in ratios.4. wo or more products produced from a common input are termed

a. common costs. *. joint products. c. joint costs. d. *& products.

!. :n a decision to sell or process further *e&ond the split off point, a mana er should *ase the decision on

a. the amount of joint product costs allocated. *. the incremental revenue attaina*le *e&ond the split off point.

c. the incremental cost incurred *e&ond the split off point. d. the incremental operatin income attaina*le *e&ond the split off point.). he e al, :nc. ma

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c. $311,!00 hi her. d. $120,(!0 hi her.

(. he 9orldCo has two divisions 8orth and /outh. he divisions have the followinrevenues and expenses

8orth /outh/ales $4!0,000 $400,000aria*le costs 22!,000 1!0,000irect fixed costs 130,000 10!,000"llocated corporate costs 120,000 +!,000

8et income loss 2!,000 !0,000

he mana ement of 9orldCo is considerin the elimination of the 8orth ivision. :f the 8orth ivision were eliminated, the direct fixed costs associated with this divisioncould *e avoided. Diven these data, the elimination of the 8orth ivision would resultin an overall compan& net income loss of

a. $!0,000. *. $(0,000 . c. $2!,000. d. $(!,000 .

'. Jac

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10. 9hat is the lowest sellin price per unit that could *e char ed for the new product lineand still ma

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Gess Cost of :nvestment 243,000NET PRESENT VALUE 319,755 rounded-off

2. /olution- actors

=ear 1 L 1 M 1 E 1'% P1 Q 0.'4(!=ear 2 L 1 M 1 E 1'% P2 Q 0.(1'2=ear 3 L 1 M 1 E 1'% P3 Q 0.)0')=ear 4 L 1 M 1 E 1'% P4 Q 0.!1!'

he rest of the pro*lem can *e solved more efficientl& in ta*le format as show *elow

=ear 1 2 3 4 8et Cash :nflow $3,411 $4,0(0 $!,'24 $2,0)!/alva e alue +00otal Cash :nflow $3,411 $4,0(0 $!,'24 $2,+)!

N -resent alue actor 0.'4(! 0.(1'2 0.)0') 0.!1!'-resent alue of Cash lows $2,'+0.)' $2,+23.01 $3,!44.)( $1,!2+.31otal - of Cash :nflows $10,'''O :nitial :nvestment O ',320Net Pre e!t V"#$e %&,5'( t)*$ "!+

3. . )%

eed*acnl& " and C are true.

eed*ac

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8et present value anal&sis of -roject "

he present value of the cash outflow for =ear wo, -roject ? L $ 1!,000 x 0.'2) L$ 12,3+0 .

(. A- $(,34+

eed*ac