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BUSINESS NAME CALCULATION QUESTION, Assignments of Business Ethics

Anhui Medical UniversityBusiness Ethics

BUSINESS CALCULATION THAT COME FROM INTERNET AND WOULD BE USEFUL IF YOU DO THAT.

Typology: Assignments

2019/2020

Uploaded on 11/09/2020

cristina-john
cristina-john 🇨🇳

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ACCA Practice Questions, F9, Financial Management
1. Adapted from F9 Sample Questions, March/June 2018
Copper Co. is concerned about the risk associated with a proposed investment and is
looking for ways to incorporate risk into its investment appraisal process. The company has
heard that probability analysis may be useful.
The following information has been prepared:-
Year 1 Year 2
Cash flow Probabilit
y
Cash flow Probabilit
y
$ $
1,000,00
0
0.1 2,000,00
0
0.3
2,000,00
0
0.5 3,000,00
0
0.6
3,000,00
0
0.4 5,000,00
0
0.1
The proposed investment will cost $3.5m, payable in full at the start of the first year of
operation. Copper Co. uses a discount rate of 12% in investment appraisal.
Required:
a) Using a joint probability table, calculate the mean (expected) npv of the proposed
investment. 8 marks
b) Should the investment be undertaken? 3 marks
c) How can the payback period method of investment appraisal be adjusted to reflect
risk and uncertainty? 5 marks
Uncertainty increases, the PB can be shortened, leading to cash flows that
close to the present time, thus less uncertain.
Uncertainty decreases, the PB can be lengthened, making cash far from
present time.
d) Discuss the use of risk-adjusted discount rates. 4 marks
The risk-adjusted discount rate is based on the risk-free rate and a risk
premium. The risk premium is derived from the perceived level of risk
pf3
pf4

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1. Adapted from F9 Sample Questions, March/June 2018 Copper Co. is concerned about the risk associated with a proposed investment and is looking for ways to incorporate risk into its investment appraisal process. The company has heard that probability analysis may be useful. The following information has been prepared:- Year 1 Year 2 Cash flow Probabilit y Cash flow Probabilit y $ $ 1,000, 0

The proposed investment will cost $3.5m, payable in full at the start of the first year of operation. Copper Co. uses a discount rate of 12% in investment appraisal. Required: a) Using a joint probability table, calculate the mean (expected) npv of the proposed investment. 8 marks b) Should the investment be undertaken? 3 marks c) How can the payback period method of investment appraisal be adjusted to reflect risk and uncertainty? 5 marks Uncertainty increases, the PB can be shortened, leading to cash flows that close to the present time, thus less uncertain. Uncertainty decreases, the PB can be lengthened, making cash far from present time. d) Discuss the use of risk-adjusted discount rates. 4 marks The risk-adjusted discount rate is based on the risk-free rate and a risk premium. The risk premium is derived from the perceived level of risk

associated with a stream of cash flows for which the discount rate will be used to arrive at a net present value. The risk premium is adjusted upward if the level of investment risk is perceived to be high. When a high risk-adjusted discount rate is applied to a stream of cash flows, the net present value of those cash flows will be greatly reduced. Conversely, a low risk-adjusted discount rate will result in a higher net present value. A proposed investment with a higher net present value is more likely to be accepted. Thus, the discount rate is used to judge whether a proposed investment is acceptable.

Real cost of capital as the cash flows have not been adjusted for rising prices or cost (‘inflation’) during the six year period. (c) (i) using sensitivity analysis, estimate by what percentage each of the following would have to change before the project was no longer expected to be viable: Initial outlay Annual contribution The life of the agreement The discount rate (ii) what are the limitations of this sensitivity analysis?  Sensitivity analysis has several limitations: o It treats variables as if they are independent and does not consider the inter- relationships that might exist between variables. o There is no measure of the probability of changes in any of the variables occurring. o There is no automatic decision rule implied for managers. Managers do not know whether their decisions should be altered because of the level of sensitivity of a variable. (d) What further information would be useful to help the company decide whether to undertake the microbook project?  What relationship (if any) does Tigwood Ltd have with the suppliers of the microfiche readers? The success of the project is dependent upon the availability and sale of readers. What price are they to be sold at? How are they to be marketed? Would it be better for the project to be a joint venture between Tigwood and the manufacturer of microfiche readers (and possibly the photographic company that supplies the microfiche).  How accurate are the estimated cash flows? What is the effect of inflation on the cash flows?  What is the systematic risk of the project?  Is the agreement likely to be renewed after six years?  If the project is successful is it possible to extend it to more books?  How secure is the market from competitors? Is it possible to obtain patent protection on the microbooks?