Topic: Investment Decisions

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BMF – Nov 2020 – L1 – SB – Q5 – Investment Decisions

Evaluate the investment project using IRR and advise management on the project feasibility.

Uhuru Nigeria Limited wants to buy a new item of equipment which will be used to improve service delivery to its customers. Using the internal rate of return (IRR) method of investment appraisal, you are required to evaluate the project and advise the management of the company. Estimated cash flows from the project are as provided below:

Year Cash Flow (N)
0 (400,000)
1 140,000
2 150,000
3 170,000
4 190,000

The expected minimum required rate of return of the company is fixed at 25%.

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  • 20 Marks

BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions

Appraise a proposed investment using the Internal Rate of Return and evaluate the use of the Accounting Rate of Return.

Management decisions regarding the acquisition of non-current assets and other long-term investments involve huge capital outlay, and they are critical to the future profitability and success of the company.

Gboza Limited proposed to buy a plant costing N2,000,000 which is expected to generate annual net cash flow of N600,000 for six years at a cost of capital of 10%.

Required:

a. Appraise the project using the internal rate of return. (13 Marks)
b. Should the plant be purchased? (2 Marks)
c. State TWO advantages and THREE disadvantages of accounting rate of return (ARR) as an investment appraisal technique. (5 Marks)

(Total 20 Marks)

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  • 1 Marks

BMF – Nov 2014 – L1 – SA – Q9 – Investment Decisions

Identifies which option is not a discounted cash flow investment appraisal technique.

Which of the following is NOT a discounted cash flow investment appraisal technique?
A. Net present value
B. Internal rate of return
C. Profitability index
D. Discounted payback period
E. Payback period

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  • 1 Marks

BMF – MAY 2015 – L1 – SA – Q17 – Investment Decisions

Understanding the decision rule for investment acceptance based on NPV.

The decision rule for the acceptance of investment using Net Present Value (NPV) method is, accept if the:

A. NPV ≥ 0
B. NPV > 0
C. NPV < 0
D. NPV ≤ 0
E. NPV = 0

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  • 1 Marks

BF – Nov 2015 – L1 – SA – Q10 – Investment Decisions

Identifying the correct formula for calculating Net Present Value (NPV) of an investment.

The formula for calculating Net Present Value (NPV) of an investment is:
A. Σₜ=₁ⁿ [(Cₜ / (1 + r)ᵗ)] – C₀
B. Σₜ=₀ⁿ [(Cₜ / (1 + r)ᵗ)] – C₀
C. Σₜ=₀ⁿ [(C₀ / (1 + r)ᵗ)] – C₀
D. Σₜ=₁ⁿ [(C₀ / (1 + r)ᵗ)] – C₀
E. Σₜ=₁ⁿ [(Cₜ / (1 + r)ᵗ)] + C₀

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  • 1 Marks

BF – Nov 2015 – L1 – SA – Q8 – Investment Decisions

Identifying the spontaneous source of short-term finance.

Which of the underlisted short-term finance sources can be regarded as a spontaneous source of short term fund?
A. Bank overdrafts
B. Accruals
C. Line of credit
D. Revolving credit agreement
E. Commercial paper

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Has Case Study
  • 20 Marks

SCS – Apr 2022 – L3 – Q6 – Investment decisions

Compute NPV for two investment options and evaluate potential benefits and difficulties for HPC.

a) For the two strategic development options being considered by HPC, compute:
i) the Net Present Value of Option 1.
ii) the Net Present Value of Option 2.
iii) the Net Present Value for the worst-case outcome for Option 1. (10 marks)

b) Discuss THREE (3) potential benefits and TWO (2) difficulties for HPC of undertaking each of the strategic development options. Your answer should include an evaluation of the calculations of the profitability index of each option. (10 marks)

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  • 14 Marks

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

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

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.

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  • 6 Marks

BMF – Nov 2021 – L1 – SB – Q5A – Investment Decisions

This question asks candidates to state three advantages and three disadvantages of the Accounting Rate of Return (ARR) method of investment appraisal.

State THREE advantages and THREE disadvantages of the Accounting Rate of Return (ARR) method of investment appraisal.

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  • 1 Marks

BMF – Nov 2021 – L1 – SA – Q15 – Investment Decisions

Question about the relevant cost for capital investment decisions.

The concept of cash flow is of vital importance to capital investment appraisal. Which of the following costs is relevant to investment decisions?

A. Future costs
B. Notional costs
C. Committed cost
D. Absorbed cost
E. Apportionment cost

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  • 20 Marks

BMF – Nov 2020 – L1 – SB – Q5 – Investment Decisions

Evaluate the investment project using IRR and advise management on the project feasibility.

Uhuru Nigeria Limited wants to buy a new item of equipment which will be used to improve service delivery to its customers. Using the internal rate of return (IRR) method of investment appraisal, you are required to evaluate the project and advise the management of the company. Estimated cash flows from the project are as provided below:

Year Cash Flow (N)
0 (400,000)
1 140,000
2 150,000
3 170,000
4 190,000

The expected minimum required rate of return of the company is fixed at 25%.

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  • 20 Marks

BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions

Appraise a proposed investment using the Internal Rate of Return and evaluate the use of the Accounting Rate of Return.

Management decisions regarding the acquisition of non-current assets and other long-term investments involve huge capital outlay, and they are critical to the future profitability and success of the company.

Gboza Limited proposed to buy a plant costing N2,000,000 which is expected to generate annual net cash flow of N600,000 for six years at a cost of capital of 10%.

Required:

a. Appraise the project using the internal rate of return. (13 Marks)
b. Should the plant be purchased? (2 Marks)
c. State TWO advantages and THREE disadvantages of accounting rate of return (ARR) as an investment appraisal technique. (5 Marks)

(Total 20 Marks)

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  • 1 Marks

BMF – Nov 2014 – L1 – SA – Q9 – Investment Decisions

Identifies which option is not a discounted cash flow investment appraisal technique.

Which of the following is NOT a discounted cash flow investment appraisal technique?
A. Net present value
B. Internal rate of return
C. Profitability index
D. Discounted payback period
E. Payback period

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  • 1 Marks

BMF – MAY 2015 – L1 – SA – Q17 – Investment Decisions

Understanding the decision rule for investment acceptance based on NPV.

The decision rule for the acceptance of investment using Net Present Value (NPV) method is, accept if the:

A. NPV ≥ 0
B. NPV > 0
C. NPV < 0
D. NPV ≤ 0
E. NPV = 0

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  • 1 Marks

BF – Nov 2015 – L1 – SA – Q10 – Investment Decisions

Identifying the correct formula for calculating Net Present Value (NPV) of an investment.

The formula for calculating Net Present Value (NPV) of an investment is:
A. Σₜ=₁ⁿ [(Cₜ / (1 + r)ᵗ)] – C₀
B. Σₜ=₀ⁿ [(Cₜ / (1 + r)ᵗ)] – C₀
C. Σₜ=₀ⁿ [(C₀ / (1 + r)ᵗ)] – C₀
D. Σₜ=₁ⁿ [(C₀ / (1 + r)ᵗ)] – C₀
E. Σₜ=₁ⁿ [(Cₜ / (1 + r)ᵗ)] + C₀

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  • 1 Marks

BF – Nov 2015 – L1 – SA – Q8 – Investment Decisions

Identifying the spontaneous source of short-term finance.

Which of the underlisted short-term finance sources can be regarded as a spontaneous source of short term fund?
A. Bank overdrafts
B. Accruals
C. Line of credit
D. Revolving credit agreement
E. Commercial paper

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Has Case Study
  • 20 Marks

SCS – Apr 2022 – L3 – Q6 – Investment decisions

Compute NPV for two investment options and evaluate potential benefits and difficulties for HPC.

a) For the two strategic development options being considered by HPC, compute:
i) the Net Present Value of Option 1.
ii) the Net Present Value of Option 2.
iii) the Net Present Value for the worst-case outcome for Option 1. (10 marks)

b) Discuss THREE (3) potential benefits and TWO (2) difficulties for HPC of undertaking each of the strategic development options. Your answer should include an evaluation of the calculations of the profitability index of each option. (10 marks)

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  • 14 Marks

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

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

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.

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  • 6 Marks

BMF – Nov 2021 – L1 – SB – Q5A – Investment Decisions

This question asks candidates to state three advantages and three disadvantages of the Accounting Rate of Return (ARR) method of investment appraisal.

State THREE advantages and THREE disadvantages of the Accounting Rate of Return (ARR) method of investment appraisal.

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  • 1 Marks

BMF – Nov 2021 – L1 – SA – Q15 – Investment Decisions

Question about the relevant cost for capital investment decisions.

The concept of cash flow is of vital importance to capital investment appraisal. Which of the following costs is relevant to investment decisions?

A. Future costs
B. Notional costs
C. Committed cost
D. Absorbed cost
E. Apportionment cost

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