Question Tag: Net Present Value (NPV)

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FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate a proposed investment for Keke Plc, identify errors in the initial appraisal, recalculate NPV, and discuss IRR and business risk issues.

Question

The following draft appraisal of a proposed investment project has been prepared for the Finance Director of Keke Plc (KP) by a trainee accountant. The project is consistent with the current business operations of KP.

Year	1	2	3	4	5
Sales (units/yr)	250,000	400,000	500,000	250,000
Contribution (₦000)	13,300	21,280	26,600	13,300	–
Fixed costs (₦000)	(5,300)	(5,618)	(5,955)	(6,312)	–
Depreciation (₦000)	(4,375)	(4,375)	(4,375)	(4,375)	–
Interest payments (₦000)	(2,000)	(2,000)	(2,000)	(2,000)	–
Taxable profit (₦000)	1,625	9,287	14,270	613
Taxation (₦000)	–	(488)	(2,786)	(4,281)	(184)
Profit after tax (₦000)	1,625	8,799	11,484	(3,668)	(184)
Scrap value (₦000)	–	–	–	2,500	–
After-tax cash flows (₦000)	1,625	8,799	11,484	(1,168)	(184)
Discount at 10%	0.909	0.826	0.751	0.683	0.621
Present values (₦000)	1,477	7,268	8,624	(798)	(114)

Net present value = (16,457,000 – 20,000,000) = ₦3,543,000, so reject the project.

Additional Information:

The initial investment is ₦20 million.
Selling price: ₦120/unit (current price terms), selling price inflation is 5% per year.
Variable cost: ₦70/unit (current price terms), variable cost inflation is 4% per year.
Fixed overhead costs: ₦5,000,000/year (current price terms), fixed cost inflation is 6% per year.
₦2,000,000/year of the fixed costs are development costs that have already been incurred and are being recovered by annual charges to the project.
Investment financing is by a ₦20 million loan at a fixed interest rate of 10% per year.
Keke Plc can claim 25% reducing balance tax allowable depreciation on this investment and pays taxation one year in arrears at a rate of 30% per year.
The scrap value of machinery at the end of the four-year project is ₦2,500,000.
The real weighted average cost of capital of Keke is 7% per year.
The general rate of inflation is expected to be 4.7% per year.

Required:

a. Identify and comment on any errors in the investment appraisal prepared by the trainee accountant.
(4 Marks)

b. Prepare a revised calculation of the net present value of the proposed investment project and comment on the project’s acceptability.
(12 Marks)

c. Discuss the problems faced when undertaking investment appraisal in the following areas and comment on how these problems can be overcome:
i. An investment project has several internal rates of return;
ii. The business risk of an investment project is significantly different from the business risk of current operations.
(4 Marks)

(Total: 20 Marks)

Answer

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Tags: Business risk, Depreciation, Discount rate, Fixed Costs, Inflation, Internal Rate of Return (IRR), Investment Appraisal, Net Present Value (NPV)
Level: Level 3

Topic: Investment Appraisal Techniques
Series: MAY 2024

BMF – Nov 2021 – L1 – SB – Q5B – Investment Decisions

This question asks candidates to evaluate two investment projects using the Net Present Value (NPV) method.

Question

McPat Investment Limited is considering investing in either of two mutually exclusive projects, namely Axiom and Axis. Each project costs ₦1.5 billion. The cost of capital to the company is 15%. The projected cash flows from the two projects are as stated below:

Year	Axiom (₦’000)	Axis (₦’000)
1	220,000	200,000
2	220,000	200,000
3	240,000	220,000
4	240,000	220,000
5	300,000	340,000
6	300,000	340,000
7	280,000	280,000

You are required to evaluate the projects using the Net Present Value method to decide which one to accept.

Answer

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Tags: Discounted Cash Flow, Investment Appraisal, Net Present Value (NPV), Project Selection
Level: Level 1

Topic: Investment Decisions
Series: NOV 2021

AFM – May 2019 – L3 – Q2b – International investment and financing decisions

Calculate the NPV for a multinational company planning to set up a subsidiary in Ghana and provide a recommendation for management.

Question

A Multinational Company (MNC) is planning to set up a subsidiary company in Ghana (where hitherto it was exporting) in view of growing demand for its product and competition from other MNCs. The initial project cost (consisting of Plant and Machinery including installation) is estimated to be GH¢500 million. The net working capital requirements are estimated at GH¢50 million. The company follows the straight-line method of depreciation. Presently, the company is exporting two million units every year at a unit price of GH¢80, with variable costs per unit being GH¢40.

The Chief Finance Officer has estimated the following operating cost and other data in respect of the proposed project:
i) Variable operating cost will be GH¢20 per unit of production.
ii) Additional cash fixed cost will be GH¢30 million p.a. and the project’s share of allocated fixed cost will be GH¢3 million p.a. based on the principle of ability to share.
iii) Production capacity of the proposed project in Ghana will be 5 million units.
iv) Expected useful life of the proposed plant is five years with no salvage value.
v) Existing working capital investment for production & sale of two million units through exports was GH¢15 million.
vi) Exports of the product in the coming year will decrease to 1.5 million units if the company does not open a subsidiary in Ghana, due to competing MNCs setting up subsidiaries in Ghana.
vii) Applicable corporate income tax rate is 35%.
viii) Required rate of return for such a project is 12%.
ix) Assume that there will be no variations in the exchange rate of the two currencies and all profits will be repatriated, as there will be no withholding tax.

Required:
Calculate the Net Present Value (NPV) of the proposed project in Ghana and advise management.
(10 marks)

Answer

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Tags: Fixed Costs, International Investment, Multinational, Net Present Value (NPV), Subsidiary, Taxation
Level: Level 3

Topic: International investment and financing decisions
Series: MAY 2019

AFM – Nov 2018 – L3 – Q2b – International investment and financing decisions

Evaluate the impact of profit repatriation restrictions and provide strategies to deal with blocked funds in international investments.

Question

Suppose the South African government changes its policy on profit repatriation and legislates that profit cannot be repatriated until termination or exit.

i) If Rock can invest blocked funds in South Africa for a 12% annual rate of return, by how much would the project’s NPV differ from your results in sub-question (a) above?
(5 marks)

ii) Suggest THREE (3) ways through which Rock can deal with the risk of blocked funds.
(3 marks)

Answer

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Tags: Blocked Funds, Currency Exchange Rates, Financial strategy, International Investment, Net Present Value (NPV), Profit repatriation
Level: Level 3

Topic: International investment and financing decisions
Series: NOV 2018

AFM – Nov 2018 – L3 – Q2a – International investment and financing decisions

Evaluate an international mining investment opportunity in South Africa using NPV approach for financial feasibility.

Question

Rock Minerals Ltd (Rock) is a minerals mining company based in Ghana. Rock is considering an investment opportunity in South Africa, which involves developing and operating a gold mine and later transferring the mine to the South African government.

Last year, the directors commissioned a special committee to assess investments and regulatory requirements relating to the project. Based on the committee’s report, the directors estimate that it will take two years to develop the mine. Development of the mine entails an immediate outlay of ZAR1.2 million in regulatory requirement expenditures, an investment of ZAR20 million in plants and equipment in the first year, and ZAR15 million for development expenditure in the second year. The directors also estimate that Rock will invest ZAR2 million in net working capital at the beginning of the third year. The investment in net working capital is expected to be increased to ZAR3 million at the beginning of the fifth year.

Commercial production and sales are expected to begin in the third year. Below are estimated operating cash flows before tax in the first three years of commercial production:

Year	Revenue collections (ZAR’ millions)	Variable operating costs (ZAR’ millions)	Fixed operating costs (ZAR’ millions)
3	100	40	20
4	150	50	25
5	210	80	30

At the end of the fifth year, Rock will transfer ownership and control of the mine to the South African government for an after-tax consideration of ZAR100 million. The special committee also reports that the income tax rate for mining operations is 30%, and capital expenditure in relation to acquisition of property, plant, and equipment, and development expenditure qualifies for capital allowance at the rate of 20% per annum on a straight-line basis. Capital allowance is granted at the end of each year of commercial production. On repatriation of profit, the committee reports that the South African government does not restrict the repatriation of profit, and there are no profit repatriation taxes. Rock would repatriate cash returns as they become available.

Rock plans to finance this project using existing capital. Rock’s after-tax cost of capital is 25% in Ghana. The annual rate of inflation is expected to be 11% in Ghana and 5% in South Africa in the coming years. Currently, the rate of exchange between the Ghanaian cedi (GH¢) and the South African rand (ZAR) is GH¢0.3822 = ZAR1.

Required:
Evaluate the project on financial grounds using the net present value (NPV) approach and recommend whether the investment proposal should be accepted for implementation or not.
(12 marks)

Answer

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Tags: Capital Budgeting, Cash Flows, Currency Exchange Rates, Financing, International Investment, Mining Projects, Net Present Value (NPV)
Level: Level 3

Topic: International investment and financing decisions
Series: NOV 2018

AFM – May 2018 – L3 – Q2 – Discounted cash flow techniques | Valuation and the use of free cash flows

Evaluating investment options using NPV and IRR to advise a company on which projects should be undertaken.

Question

The Board of Peartek Ltd is considering the company’s capital investment options for the coming year, and is evaluating the following potential investments:

Investment A:

Investment of GH¢60,000, including GH¢40,000 for capital equipment and GH¢20,000 for increases in working capital.
Expected sales of 10,000 units next year with a sales price of GH¢10 and variable costs of GH¢6 per unit.
Sales price is expected to decline by 20% per annum due to competition, sales volume to fall by 10%, and variable costs to decline by 20%.
Overheads of GH¢15,000 annually, including a GH¢4,000 depreciation charge.
The project will be wound up in year three, with working capital recovered and capital equipment sold off for 25% of its cost.

Investment B:

Immediate outlay of GH¢90,000, financed by borrowing at 6%.
Expected net profits of GH¢12,000 next year, rising by 3% per annum indefinitely.

Investment C:

Outlay of GH¢25,000 financed by retained profits.
Expected annual net cash profits:
- Years 1 to 4: GH¢3,000
- Years 5 to 7: GH¢5,000
- From year 8 onwards: GH¢7,000 in perpetuity.

The company discounts projects lasting 10 years or less at 10%, and others at 13%. Ignore taxation.

Required:

a) As a financial management analyst, you have been asked to advise the board of Peartek Ltd (in the form of a briefing report) which investment should be undertaken. Use the NPV method in your analysis. (15 marks)

b) Minority of board members feel that the Internal Rate of Return (IRR) should also be used as either an alternative or a complementary method of investment appraisal. Calculate the IRR of investments A and B and comment accordingly. (5 marks)

Answer

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Tags: Capital Budgeting, Internal Rate of Return (IRR), Investment Appraisal, Net Present Value (NPV)
Level: Level 3

Topic: Discounted cash flow techniques, Valuation and use of free cash flows
Series: MAY 2018

AFM – May 2016 – L3 – Q2a – Discounted cash flow techniques, Valuation and use of free cash flows, Theories of capital structure

Compute NPV for two investment projects using WACC and CAPM, and provide recommendations based on risk analysis.

Question

a) Joebel Limited is a diversified company operating in different industries on the African Continent. The shares of the company are widely traded on the stock exchange and currently have a market price of GH¢3.20 per share. The company’s dividend payment over the last five years is as follows:

Year	Dividend Per Share (DPS) (GH¢)
2015	0.35
2014	0.32
2013	0.30
2012	0.29
2011	0.28

The Board of Directors of Joebel Limited is considering two main investment opportunities: one in the Oil and Gas sector and the other in the Hotel and Tourism sector. Both projects have short lives and their associated cash flows are as follows:

Year	Oil & Gas (GH¢’000)	Hotel & Tourism (GH¢’000)
1	85	180
2	175	195
3	160	150

The investment in Oil and Gas would cost GH¢400,000, while the investment in Hotel and Tourism would cost GH¢405,000. The Management of the Company has identified the industry beta for Oil and Gas as 1.2 and for Hotel and Tourism as 1.6. However, Joebel Limited’s company beta is 1.5. The average return on companies listed on the stock exchange is 25%, and the yield on Treasury bills is 20%.

Required:
i) Compute the Net Present Values (NPV) of both projects using the company’s weighted average cost of capital as the discount rate. (5 marks)
ii) Compute the NPV using a discount rate that takes into account the risk associated with the individual projects. (5 marks)
iii) Advise Management regarding the suitability and acceptability of the projects. (1 mark)

Answer

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Tags: Cost of Capital, Hotel & Tourism, Investment Appraisal, Net Present Value (NPV), Oil & Gas, Risk
Level: Level 3

Topic: Discounted cash flow techniques, Valuation and use of free cash flows
Series: MAY 2016

FM – May 2020 – L2 – Q4 – Discounted cash flow | Introduction to Investment Appraisal

Calculate the NPV and payback periods for a project, and explain concepts related to market volatility and bull/bear markets.

Question

Sabir Company is considering whether to invest in a project whose details are as follows.
The project will involve the purchase of equipment costing GH¢2,000,000. The equipment will be used to produce a range of products for which the following estimates have been made.

Incremental fixed costs are GH¢1,200,000 per annum. The sales prices allow for expected price increases over the period. However, cost estimates are based on current costs and do not allow for expected inflation in costs. Inflation is expected to be 3% per year for variable costs and 4% per year for fixed costs. The incremental fixed costs are all cash expenditure items. Tax on profits is at the rate of 30%, and tax is payable in the same year in which the liability arises.

Sabir Company uses a four-year project appraisal period, but it is expected that the equipment will continue to be operational and in use for several years after the end of the first four-year period.

The company’s cost of capital for investment appraisal purposes is 10%. Capital projects are expected to pay back within two years on a non-discounted basis and within three years on a discounted basis. Tax allowable depreciation will be available on the equipment at the rate of 25% per year on a reducing balance basis. Any balancing allowance or balancing charge is not attributed to a project unless the asset is actually disposed of at the end of the project period.

Required:

a) Calculate the net present value (NPV) of the project.
(11 marks)

b) To the nearest month, calculate the non-discounted payback period and the discounted payback period.
(4 marks)

c) Explain the meaning of market volatility in financial markets.
(3 marks)

d) Explain the difference between a bull and bear market.
(2 marks)

Answer

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Tags: Bull and bear markets, Discounted Cash Flow, Investment Appraisal, Market Volatility, Net Present Value (NPV), Payback Period
Level: Level 2

Topic: Discounted cash flow, Introduction to Investment Appraisal
Series: MAY 2020

FM – Nov 2023 – L2 – Q4 – Capital structure | DCF: Risk and uncertainty

Explain systematic, business, and financial risk; compute expected NPV for projects; and discuss traditional and Modigliani-Miller views on gearing and WACC.

Question

a) Understanding risk is key for a robust risk and control environment in modern business organisations.
Required:
In the light of the above, explain the following:
i) Systematic risk (2 marks)
ii) Business risk (2 marks)
iii) Financial risk (2 marks)

b) Quantum Investment Ltd in the past has been concentrating all its investments in one project that performed badly consistently over the past few years. They have therefore decided to adopt a diversification strategy by investing in projects A, B, and C. The table below presents the Net Present Value (NPV) of the projects under different states of the economy.

State of Economy	Probability	Project A	Project B	Project C
Bad	0.2	GH¢10 million	GH¢12 million	GH¢15 million
Average/Normal	0.5	GH¢20 million	GH¢22 million	GH¢30 million
Good	0.3	GH¢35 million	GH¢40 million	GH¢45 million

The company has GH¢200 million for investments in these three projects:
Project A = GH¢40 million
Project B = GH¢60 million
Project C = GH¢100 million

Required:
Compute the expected NPV for each of the three projects. (9 marks)

c) In capital structure decisions, there are two views of gearing and weighted average cost of capital (WACC): the traditional view and the Modigliani-Miller view.
Required:
Explain the two views with respect to gearing and WACC. (5 marks)

Answer

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Tags: Business risk, Financial risk, Gearing, Net Present Value (NPV), Systematic risk, Weighted Average Cost of Capital (WACC)
Level: Level 2

Topic: Capital structure, DCF: Risk and uncertainty
Series: NOV 2023

FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Evaluates the viability of an investment using NPV and IRR and explains the criteria venture capitalists consider when funding applications.

Question

a) Sakyiama Poultry Farms is considering purchasing a new incubator that will improve its incubation efficiency to 90% as against the current 50%. The incubator, which is to be purchased immediately, will cost GH¢120,000. The incubator has a useful life of 4 years, after which it would be sold for scrap at GH¢10,000. The current contribution of GH¢3 per day-old chick will not change. The number of day-old chicks sold at 12,000 units per annum will increase by 80%. Fixed cost will be GH¢20,000 per annum. Sakyiama Farms has an after-tax cost of capital of 12.5% and pays tax in the year in which profit is made at a rate of 15% per annum. The farm is also entitled to capital allowance at 25% on a reducing balance.

i) Calculate the Net Present Value (NPV) and the viability of the investment. (7 marks)
ii) Calculate the Internal Rate of Return (IRR). (8 marks)

b) Two blue-chip companies – Abu Ltd and Ada Ltd are seeking to raise funds from venture capital to boost their production in order to satisfy demand for their solar-powered refrigeration and air-conditioning systems, which they developed through a joint venture. They have consulted you for advice.

Required:
Explain FIVE conditions that a venture capitalist will consider in accessing an application for funding. (5 marks)

Answer

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Tags: Capital Allowance, Internal Rate of Return (IRR), Investment Decision, Net Present Value (NPV), Venture Capital
Level: Level 2

Topic: Cost of capital, Introduction to Investment Appraisal
Series: NOV 2016

FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate a proposed investment for Keke Plc, identify errors in the initial appraisal, recalculate NPV, and discuss IRR and business risk issues.

Question

Year	1	2	3	4	5
Sales (units/yr)	250,000	400,000	500,000	250,000
Contribution (₦000)	13,300	21,280	26,600	13,300	–
Fixed costs (₦000)	(5,300)	(5,618)	(5,955)	(6,312)	–
Depreciation (₦000)	(4,375)	(4,375)	(4,375)	(4,375)	–
Interest payments (₦000)	(2,000)	(2,000)	(2,000)	(2,000)	–
Taxable profit (₦000)	1,625	9,287	14,270	613
Taxation (₦000)	–	(488)	(2,786)	(4,281)	(184)
Profit after tax (₦000)	1,625	8,799	11,484	(3,668)	(184)
Scrap value (₦000)	–	–	–	2,500	–
After-tax cash flows (₦000)	1,625	8,799	11,484	(1,168)	(184)
Discount at 10%	0.909	0.826	0.751	0.683	0.621
Present values (₦000)	1,477	7,268	8,624	(798)	(114)

Net present value = (16,457,000 – 20,000,000) = ₦3,543,000, so reject the project.

Additional Information:

The initial investment is ₦20 million.
Selling price: ₦120/unit (current price terms), selling price inflation is 5% per year.
Variable cost: ₦70/unit (current price terms), variable cost inflation is 4% per year.
Fixed overhead costs: ₦5,000,000/year (current price terms), fixed cost inflation is 6% per year.
₦2,000,000/year of the fixed costs are development costs that have already been incurred and are being recovered by annual charges to the project.
Investment financing is by a ₦20 million loan at a fixed interest rate of 10% per year.
Keke Plc can claim 25% reducing balance tax allowable depreciation on this investment and pays taxation one year in arrears at a rate of 30% per year.
The scrap value of machinery at the end of the four-year project is ₦2,500,000.
The real weighted average cost of capital of Keke is 7% per year.
The general rate of inflation is expected to be 4.7% per year.

Required:

a. Identify and comment on any errors in the investment appraisal prepared by the trainee accountant.
(4 Marks)

b. Prepare a revised calculation of the net present value of the proposed investment project and comment on the project’s acceptability.
(12 Marks)

(Total: 20 Marks)

Answer

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Tags: Business risk, Depreciation, Discount rate, Fixed Costs, Inflation, Internal Rate of Return (IRR), Investment Appraisal, Net Present Value (NPV)
Level: Level 3

Topic: Investment Appraisal Techniques
Series: MAY 2024

BMF – Nov 2021 – L1 – SB – Q5B – Investment Decisions

This question asks candidates to evaluate two investment projects using the Net Present Value (NPV) method.

Question

Year	Axiom (₦’000)	Axis (₦’000)
1	220,000	200,000
2	220,000	200,000
3	240,000	220,000
4	240,000	220,000
5	300,000	340,000
6	300,000	340,000
7	280,000	280,000

You are required to evaluate the projects using the Net Present Value method to decide which one to accept.

Answer

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Tags: Discounted Cash Flow, Investment Appraisal, Net Present Value (NPV), Project Selection
Level: Level 1

Topic: Investment Decisions
Series: NOV 2021

AFM – May 2019 – L3 – Q2b – International investment and financing decisions

Calculate the NPV for a multinational company planning to set up a subsidiary in Ghana and provide a recommendation for management.

Question

Required:
Calculate the Net Present Value (NPV) of the proposed project in Ghana and advise management.
(10 marks)

Answer

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Tags: Fixed Costs, International Investment, Multinational, Net Present Value (NPV), Subsidiary, Taxation
Level: Level 3

Topic: International investment and financing decisions
Series: MAY 2019

AFM – Nov 2018 – L3 – Q2b – International investment and financing decisions

Evaluate the impact of profit repatriation restrictions and provide strategies to deal with blocked funds in international investments.

Question

Suppose the South African government changes its policy on profit repatriation and legislates that profit cannot be repatriated until termination or exit.

i) If Rock can invest blocked funds in South Africa for a 12% annual rate of return, by how much would the project’s NPV differ from your results in sub-question (a) above?
(5 marks)

ii) Suggest THREE (3) ways through which Rock can deal with the risk of blocked funds.
(3 marks)

Answer

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Tags: Blocked Funds, Currency Exchange Rates, Financial strategy, International Investment, Net Present Value (NPV), Profit repatriation
Level: Level 3

Topic: International investment and financing decisions
Series: NOV 2018

AFM – Nov 2018 – L3 – Q2a – International investment and financing decisions

Evaluate an international mining investment opportunity in South Africa using NPV approach for financial feasibility.

Question

Commercial production and sales are expected to begin in the third year. Below are estimated operating cash flows before tax in the first three years of commercial production:

Year	Revenue collections (ZAR’ millions)	Variable operating costs (ZAR’ millions)	Fixed operating costs (ZAR’ millions)
3	100	40	20
4	150	50	25
5	210	80	30

Answer

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Tags: Capital Budgeting, Cash Flows, Currency Exchange Rates, Financing, International Investment, Mining Projects, Net Present Value (NPV)
Level: Level 3

Topic: International investment and financing decisions
Series: NOV 2018

AFM – May 2018 – L3 – Q2 – Discounted cash flow techniques | Valuation and the use of free cash flows

Evaluating investment options using NPV and IRR to advise a company on which projects should be undertaken.

Question

The Board of Peartek Ltd is considering the company’s capital investment options for the coming year, and is evaluating the following potential investments:

Investment A:

Investment of GH¢60,000, including GH¢40,000 for capital equipment and GH¢20,000 for increases in working capital.
Expected sales of 10,000 units next year with a sales price of GH¢10 and variable costs of GH¢6 per unit.
Sales price is expected to decline by 20% per annum due to competition, sales volume to fall by 10%, and variable costs to decline by 20%.
Overheads of GH¢15,000 annually, including a GH¢4,000 depreciation charge.
The project will be wound up in year three, with working capital recovered and capital equipment sold off for 25% of its cost.

Investment B:

Immediate outlay of GH¢90,000, financed by borrowing at 6%.
Expected net profits of GH¢12,000 next year, rising by 3% per annum indefinitely.

Investment C:

Outlay of GH¢25,000 financed by retained profits.
Expected annual net cash profits:
- Years 1 to 4: GH¢3,000
- Years 5 to 7: GH¢5,000
- From year 8 onwards: GH¢7,000 in perpetuity.

The company discounts projects lasting 10 years or less at 10%, and others at 13%. Ignore taxation.

Required:

Answer

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Tags: Capital Budgeting, Internal Rate of Return (IRR), Investment Appraisal, Net Present Value (NPV)
Level: Level 3

Topic: Discounted cash flow techniques, Valuation and use of free cash flows
Series: MAY 2018

AFM – May 2016 – L3 – Q2a – Discounted cash flow techniques, Valuation and use of free cash flows, Theories of capital structure

Compute NPV for two investment projects using WACC and CAPM, and provide recommendations based on risk analysis.

Question

Year	Dividend Per Share (DPS) (GH¢)
2015	0.35
2014	0.32
2013	0.30
2012	0.29
2011	0.28

Year	Oil & Gas (GH¢’000)	Hotel & Tourism (GH¢’000)
1	85	180
2	175	195
3	160	150

Answer

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Tags: Cost of Capital, Hotel & Tourism, Investment Appraisal, Net Present Value (NPV), Oil & Gas, Risk
Level: Level 3

Topic: Discounted cash flow techniques, Valuation and use of free cash flows
Series: MAY 2016

FM – May 2020 – L2 – Q4 – Discounted cash flow | Introduction to Investment Appraisal

Calculate the NPV and payback periods for a project, and explain concepts related to market volatility and bull/bear markets.

Question

Required:

a) Calculate the net present value (NPV) of the project.
(11 marks)

b) To the nearest month, calculate the non-discounted payback period and the discounted payback period.
(4 marks)

c) Explain the meaning of market volatility in financial markets.
(3 marks)

d) Explain the difference between a bull and bear market.
(2 marks)

Answer

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Tags: Bull and bear markets, Discounted Cash Flow, Investment Appraisal, Market Volatility, Net Present Value (NPV), Payback Period
Level: Level 2

Topic: Discounted cash flow, Introduction to Investment Appraisal
Series: MAY 2020

FM – Nov 2023 – L2 – Q4 – Capital structure | DCF: Risk and uncertainty

Explain systematic, business, and financial risk; compute expected NPV for projects; and discuss traditional and Modigliani-Miller views on gearing and WACC.

Question

State of Economy	Probability	Project A	Project B	Project C
Bad	0.2	GH¢10 million	GH¢12 million	GH¢15 million
Average/Normal	0.5	GH¢20 million	GH¢22 million	GH¢30 million
Good	0.3	GH¢35 million	GH¢40 million	GH¢45 million

The company has GH¢200 million for investments in these three projects:
Project A = GH¢40 million
Project B = GH¢60 million
Project C = GH¢100 million

Required:
Compute the expected NPV for each of the three projects. (9 marks)

Answer

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Tags: Business risk, Financial risk, Gearing, Net Present Value (NPV), Systematic risk, Weighted Average Cost of Capital (WACC)
Level: Level 2

Topic: Capital structure, DCF: Risk and uncertainty
Series: NOV 2023

FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Evaluates the viability of an investment using NPV and IRR and explains the criteria venture capitalists consider when funding applications.

Question

i) Calculate the Net Present Value (NPV) and the viability of the investment. (7 marks)
ii) Calculate the Internal Rate of Return (IRR). (8 marks)

Required:
Explain FIVE conditions that a venture capitalist will consider in accessing an application for funding. (5 marks)

Answer

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Tags: Capital Allowance, Internal Rate of Return (IRR), Investment Decision, Net Present Value (NPV), Venture Capital
Level: Level 2

Topic: Cost of capital, Introduction to Investment Appraisal
Series: NOV 2016

Question Tag: Net Present Value (NPV)

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FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Evaluates the viability of an investment using NPV and IRR and explains the criteria venture capitalists consider when funding applications.

You're reporting an error for "FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal"

FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate a proposed investment for Keke Plc, identify errors in the initial appraisal, recalculate NPV, and discuss IRR and business risk issues.

You're reporting an error for "FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques"

BMF – Nov 2021 – L1 – SB – Q5B – Investment Decisions

This question asks candidates to evaluate two investment projects using the Net Present Value (NPV) method.

You're reporting an error for "BMF – Nov 2021 – L1 – SB – Q5B – Investment Decisions"

AFM – May 2019 – L3 – Q2b – International investment and financing decisions

Calculate the NPV for a multinational company planning to set up a subsidiary in Ghana and provide a recommendation for management.

You're reporting an error for "AFM – May 2019 – L3 – Q2b – International investment and financing decisions"

AFM – Nov 2018 – L3 – Q2b – International investment and financing decisions

Evaluate the impact of profit repatriation restrictions and provide strategies to deal with blocked funds in international investments.

You're reporting an error for "AFM – Nov 2018 – L3 – Q2b – International investment and financing decisions"

AFM – Nov 2018 – L3 – Q2a – International investment and financing decisions

Evaluate an international mining investment opportunity in South Africa using NPV approach for financial feasibility.

You're reporting an error for "AFM – Nov 2018 – L3 – Q2a – International investment and financing decisions"

AFM – May 2018 – L3 – Q2 – Discounted cash flow techniques | Valuation and the use of free cash flows

Evaluating investment options using NPV and IRR to advise a company on which projects should be undertaken.

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You're reporting an error for "AFM – May 2018 – L3 – Q2 – Discounted cash flow techniques | Valuation and the use of free cash flows"

AFM – May 2016 – L3 – Q2a – Discounted cash flow techniques, Valuation and use of free cash flows, Theories of capital structure

Compute NPV for two investment projects using WACC and CAPM, and provide recommendations based on risk analysis.

You're reporting an error for "AFM – May 2016 – L3 – Q2a – Discounted cash flow techniques, Valuation and use of free cash flows, Theories of capital structure"

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Calculate the NPV and payback periods for a project, and explain concepts related to market volatility and bull/bear markets.

You're reporting an error for "FM – May 2020 – L2 – Q4 – Discounted cash flow | Introduction to Investment Appraisal"

FM – Nov 2023 – L2 – Q4 – Capital structure | DCF: Risk and uncertainty

Explain systematic, business, and financial risk; compute expected NPV for projects; and discuss traditional and Modigliani-Miller views on gearing and WACC.

You're reporting an error for "FM – Nov 2023 – L2 – Q4 – Capital structure | DCF: Risk and uncertainty"

FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Evaluates the viability of an investment using NPV and IRR and explains the criteria venture capitalists consider when funding applications.

You're reporting an error for "FM – NOV 2016 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal"

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