F9: PROGRESS TEST 2

1 Details of a new machine are:

Capital cost $120,000
Expected operating life 5 years
Expected scrap value at the end of 5 years $20,000
Annual depreciation $20,000
Expected annual cash inflows from operations $40,000

What is the payback period?

A 6.0 years
B 5.0 years
C 3.0 years
D 2.5 years (2 marks)
2 Using the data in Question 1 above, the ROCE (using the average investment base) is :
A 57.2%
B 33.4%
C 28.6%
D 16.7% (2 marks)
3 Using the data in Question 1 above, the net present value (assuming a cost of capital of
10%) in $'000s is :
A (31.8)
B 44
C 31.6
D 0 (2 marks)
4 A project has a life of three years. In the first year, it is expected to generate sales of
$200,000, increasing at the rate of 10% per annum over the remaining two years. At the
start of each year, working capital is required equal to 10% of the sales revenue for that
year. All working capital will be released at the end of the project.
What is the net present value (to the nearest thousand dollars) of the working capital cash
flows of the project, discounting at a rate of 20% annum?
A Nil
B ($9,000)
C ($17,000)
D ($55,000) (2 marks)
F9: PROGRESS TEST 2

5 Iceberg Co is about to embark on a project to develop frozen lettuces. It involves an initial

outlay of $100,000 and cash inflows, at current prices, of $50,000, $60,000, and $40,000 at
the end of years 1,2 and 3 respectively.
Inflation is expected to be running at 10% pa during the life of the project, and the real cost
of capital is 10%.
What is the net present value of the project (to the nearest $1,000)?
A $50,000
B $26,000
C $25,000
D $5,000 (2 marks)
6 A company has 31 March as its accounting year end. On 1 April 20X6 a new machine
costing $2,000,000 is purchased. The company expects to sell the machine on 31 March
20X8 for $500,000.
The effective rate of corporation tax for the company is 35%. Tax allowable depreciation is
obtained at 25% on the reducing balance basis and a balancing allowance is available on
disposal of the asset. Tax cash flows occur 12 months after the end of the accounting period
in which the originating cash flows occurred. The company makes sufficient profits to obtain
relief for tax allowable depreciation as soon as they arise.
If the company's cost of capital is 10% per annum, what is the present value at 1 April 20X6
of the tax allowable depreciation (to the nearest $1,000)?
A $393,000
B $408,000
C $432,000
D $448,000 (2 marks)
7 Boys, Toys Co has the opportunity to undertake a five year project starting immediately. You
are given the following data.
The project requires an investment of $2,500,000 immediately.
Sales in real terms are estimated to be $2,000,000 each year. Post-tax profit margins are
estimated to be 45% of sales and working capital requirements are 15% of the coming
year’s sales.
Inflation is estimated to be 4% per year and Boys, Toys Co has a real cost of capital of
7.7%.
What is the NPV of the project (work to the nearest $1,000)?
A $771,000
B $977,000
C $1,123,000
D $1,453,000 (4 marks)
 F9: PROGRESS TEST 2

Four projects K, L, M and N are available to a company facing a shortage of capital over the next
year; the maximum capital available is $100,000. Capital is expected to be freely available
thereafter. None of the projects can be delayed.
Project
K L M N
Capital required in
next year ($'000) 30 15 45 60

NPV ($'000) 90 60 150 120

8 What will be the best NPV attainable assuming that the projects are divisible?
A $312
B $356
C $320
D $270 (2 marks)
9 What will be the best NPV attainable assuming that the projects are indivisible (ie cannot be
done in part) ?
A $210
B $300
C $270
D $320 (2 marks)
10 Alpha Co is considering buying an asset for $50,000. The asset has a 5 year life and no
residual value and 25% straight line tax allowable depreciation is available (with the first
claim in 1 years time). Alternatively, Alpha could lease the asset for five years at a cost of
$12,000 per year payable in advance. Corporation tax is 28% payable with no delay.
The company has a post tax cost of debt of 6%.
The net (cost) / benefit of leasing is:
A ($705)
B $1,478
C $13,606
D $11,422 (2 marks)