Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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1.
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1. Long-term decisions are characterised by the
following features: a. | - long time
scale
- not influenced by the firm's strategic
direction
- uncertainty
- large cash flows
- fairly easy to reverse | b. | - long time scale
- influenced by the firm's strategic
direction
- certainty
- modest cash flows
- difficult to reverse | c. | - long time scale
- influenced by the firm's strategic
direction
- uncertainty
- large cash flows
- difficult to reverse | d. | - long time scale
- not influenced by the firm's strategic
direction
- uncertainty
- modest cash flows
- difficult to reverse | | |
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2.
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If
the opportunity cost of money is 8% per annum, the present value of £5,000 which will be
received in three years' time (to the nearest £) is: a. | £3,675 | c. | £4,630 | b. | £3,969 | d. | £4,287 | | | | |
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3.
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An
initial investment of £110,000 will yield an annual cash inflow of £25,000 in each of the
next five years. Assuming that these cash inflows occur at the end of each year and that the
opportunity cost of money is 6% per annum, the net present value of the investment is
approximately: a. | £15,000 | c. | £(23,373) | b. | £12,932 | d. | £(4,692) | | | | |
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4.
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An
initial investment of £50,000 will pay back £10,000 during the first year, rising by
inflation of 2% per annum in subsequent years. The payback period for this investment is
approximately: a. | 5
years | c. | 4.92
years | b. | 4.81 years | d. | 5.18 years | | | | |
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5.
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An
initial investment of £5,000 yields returns of £2,000 at the end of each of the next three
years. What is the approximate internal rate of return? (Hint: First compute the NPV of the
investment using interest rates of 9% and 10%).
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6.
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The
shareholders of a company have supplied 65% of the company's finance and require a rate of return of
20% per annum. The company's bankers have supplied the remaining 35% of the company's finance and
require a rate of return of 12% per annum. The company's weighted average cost of capital
is: a. | 17.2% | c. | 14.8% | b. | 16.0% | d. | 20% | | | | |
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