Investment Decisions – Page 3

SCS – Nov 2024 – L3 – Q4a – Capital Budgeting Framework

Explanation of the five key elements in the capital budgeting framework for investment appraisal.

Question

One of the Board members, Dr. Halimatu Sadia, has expressed concerns regarding Dr. Ayimadu Baffour’s consistent failure to conduct investment appraisals and capital budgeting when making long-term investment decisions.

Required:

Advise Dr. Ayimadu Baffour on the capital budgeting and strategic planning framework used for conducting investment appraisals by briefly outlining the FIVE key elements of the framework.

Answer

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Tags: Capital Budgeting, Decision Making, Financial management, Investment Appraisal, Strategic Planning
Level: Level 3

Topic: Investment Decisions
Series: Nov 2024

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

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

Question

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%.

Answer

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Tags: Capital Budgeting, Cash Flow Analysis, Internal Rate of Return (IRR), Investment Appraisal, Rate of Return
Level: Level 1

Topic: Investment Decisions
Series: NOV 2020

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.

Question

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)

Answer

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Tags: Accounting Rate of Return, Capital Budgeting, Internal Rate of Return, Investment Appraisal
Level: Level 1

Topic: Investment Decisions
Series: NOV 2014

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

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

Question

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

Answer

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Tags: Discounted Cash Flow, Investment Appraisal
Level: Level 1

Topic: Investment Decisions
Series: NOV 2014

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

Understanding the decision rule for investment acceptance based on NPV.

Question

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

Answer

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Tags: Decision rule, Financial management, Investment Analysis, Net Present Value
Level: Level 1

Topic: Investment Decisions
Series: MAY 2015

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

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

Question

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

Answer

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Tags: Financial management, Investment, NPV
Level: Level 1

Topic: Investment Decisions
Series: NOV 2015

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

Identifying the spontaneous source of short-term finance.

Question

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

Answer

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Tags: Short-term Finance, Spontaneous Fund
Level: Level 1

Topic: Investment Decisions
Series: NOV 2015

SCS – Apr 2022 – L3 – Q6 – Investment decisions

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

Question

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)

Answer

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Tags: Investment Analysis, NPV, Profitability Index, Strategic Development
Level: Level 3

Topic: Investment Decisions
Series: APR 2022

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

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.

Question

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

Answer

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Tags: Advantages of ARR, ARR, Disadvantages of ARR, Investment Appraisal
Level: Level 1

Topic: Investment Decisions
Series: NOV 2021

BMF – May 2023 – L1 – SA – Q9 – Investment Decisions

Calculate the NPV of a project with given cash inflows over a 3-year period and a 10% cost of capital.

Question

A firm plans to invest N20 million in a project with a life span of 3 years.

Projected cash inflows are as follows:

Years	Cash Flows (N Million)
1	8
2	10
3	8

If the cost of capital is 10%, calculate the NPV of the project.

A. N1.34 million
B. N1.44 million
C. N1.54 million
D. N1.64 million
E. N1.74 million

Answer

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Tags: Capital Budgeting, Cash Flow, Cost of Capital, Net Present Value
Level: Level 1

Topic: Investment Decisions
Series: MAY 2023

BMF – Nov 2019 – L1 – SB – Q6 – Investment Decisions

State decision rules for ARR and Payback Period and appraise a project using NPV.

Question

(a) State the decision rules of the following investment appraisal techniques:

i. Accounting rate of return (2 Marks)
ii. Payback period (3 Marks)

(b) Fatfelic Ltd is considering a project with the following cash flows:

Year	Cost of Plant (N)	Running Costs (N)	Savings (N)
2020	(1,280,000)
2021		480,000	840,000
2022		550,000	980,000
2023		670,000	1,120,000
2024		890,000	1,400,000

Fatfelic Ltd’s cost of capital is 10%.

Required:
i. Appraise the viability of the proposed project using the Net Present Value (NPV) method of investment appraisal.
ii. State with reasons if the project is worthwhile. (15 Marks)

Answer

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Tags: ARR, Investment Appraisal, NPV, Payback Period
Level: Level 1

Topic: Investment Decisions
Series: NOV 2019

BMF – Nov 2019 – L1 – SB – Q2b – Investment Decisions

Explain limitations of financial objectives and ways to assess performance.

Question

(b) THREE commonly-used financial objectives of a firm are to maximise shareholders’ wealth, profitability, and growth in earnings per share. However, these three objectives have some limitations hence the saying ‘no financial target on its own is ideal’.

(i) Explain the limitations of these THREE financial objectives of the firm. (6 Marks)
(ii) State and explain THREE ways by which financial performance of a firm might be assessed. (6 Marks)

Answer

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Tags: Financial objectives, Growth in Earnings, Performance Assessment, Profitability
Level: Level 1

Topic: Investment Decisions
Series: NOV 2019

BMF – May 2017 – L1 – SB – Q6b – Investment Decisions

Lists five advantages and disadvantages each of using IRR in capital investment appraisal.

Question

State FIVE advantages and disadvantages each of Internal Rate of Return (IRR) as a method used in appraising capital investments.

Answer

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Tags: Capital Budgeting, Internal Rate of Return, Investment Appraisal, IRR Advantages and Disadvantages
Level: Level 1

Topic: Investment Decisions
Series: MAY 2017

BMF – May 2017 – L1 – SB – Q6 – Investment Decisions

Calculation of ARR for a machine investment and evaluation of the advantages and disadvantages of IRR.

Question

Baseline Limited plans to buy a machine costing N500 million which will last for four years and then be sold for N5 million. Additional working capital in the sum of N5 million will be required as soon as the project starts. Net cash flow before tax is expected to be as follows:

Period	Net Cash Flow (N millions)
Period 1	244
Period 2	286
Period 3	374
Period 4	156

Baseline Limited has a targeted Return on Capital Employed of 20%. Depreciation is charged on a straight-line basis over the life of an asset.

Required:

What is the Accounting Rate of Return (ARR) of this machine?

Answer

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Tags: Accounting Rate of Return, ARR Calculation, Capital Budgeting, Investment Appraisal
Level: Level 1

Topic: Investment Decisions
Series: MAY 2017

BMF – May 2017 – L1 – SA – Q12 – Investment Decisions

Multiple-choice question on non-financial considerations in investment decisions.

Question

Which of the following is NOT regarded as a non-financial consideration in investment decisions?

A. Payback
B. Reliability
C. Efficiency
D. Speed of service
E. Customer satisfaction

Answer

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Tags: Financial Considerations, Investment, Non-Financial Considerations
Level: Level 1

Topic: Investment Decisions
Series: MAY 2017

BMF – May 2024 – L1 – SB – Q3b – Investment Decisions

Explaining the steps in investment appraisal within capital budget and strategic planning.

Question

b. Within the framework of a capital budget and strategic planning, state the FIVE steps of investment appraisal. (5 Marks)

Answer

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Tags: Capital Budgeting, Investment Appraisal, Strategic Planning
Level: Level 1

Topic: Investment Decisions
Series: MAY 2024

BMF- May 2024 – L1 – SA – Q12 – Investment Decisions

Determining profit based on given assets, liabilities, and additional capital information.

Question

Given the following information:

Total assets at December 31, Year 2: ₦150,400
Total assets at December 31, Year 1: ₦125,000
Total liabilities at December 31, Year 2: ₦43,200
Total liabilities at December 31, Year 1: ₦34,800
Additional capital input on December 31, Year 2: ₦10,000

What was the profit of the business for the year ended December 31, Year 2?
A. ₦7,000
B. ₦17,000
C. ₦27,000
D. ₦90,200
E. ₦107,200

Answer

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Tags: Business Finance, Financial Accounting, Income Statements
Level: Level 1

Topic: Investment Decisions
Series: MAY 2024

Topic: Investment Decisions

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SCS – Nov 2024 – L3 – Q4a – Capital Budgeting Framework

Explanation of the five key elements in the capital budgeting framework for investment appraisal.

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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.

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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.

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

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

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

Understanding the decision rule for investment acceptance based on NPV.

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

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

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

Identifying the spontaneous source of short-term finance.

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SCS – Apr 2022 – L3 – Q6 – Investment decisions

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

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

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

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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.

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BMF – May 2023 – L1 – SA – Q9 – Investment Decisions

Calculate the NPV of a project with given cash inflows over a 3-year period and a 10% cost of capital.

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BMF – Nov 2019 – L1 – SB – Q6 – Investment Decisions

State decision rules for ARR and Payback Period and appraise a project using NPV.

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BMF – Nov 2019 – L1 – SB – Q2b – Investment Decisions

Explain limitations of financial objectives and ways to assess performance.

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BMF – May 2017 – L1 – SB – Q6b – Investment Decisions

Lists five advantages and disadvantages each of using IRR in capital investment appraisal.

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BMF – May 2017 – L1 – SB – Q6 – Investment Decisions

Calculation of ARR for a machine investment and evaluation of the advantages and disadvantages of IRR.

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BMF – May 2017 – L1 – SA – Q12 – Investment Decisions

Multiple-choice question on non-financial considerations in investment decisions.

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BMF – May 2024 – L1 – SB – Q3b – Investment Decisions

Explaining the steps in investment appraisal within capital budget and strategic planning.

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BMF- May 2024 – L1 – SA – Q12 – Investment Decisions

Determining profit based on given assets, liabilities, and additional capital information.

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