ACCA Advanced Financial Management

Question 1

A company invests $500,000 in a project generating annual cash flows of $120,000 for 6 years. Using a cost of capital of 10% and an annuity factor of 4.355, what is the approximate NPV?

Accepted Answer

$22,600

Answer

$72,600

Answer

-$22,600

Answer

$220,000

Question 2

Which statement best describes the Modified Internal Rate of Return (MIRR)?

Accepted Answer

The rate equating the terminal value of cash flows reinvested at the cost of capital to the initial investment

Answer

The rate that sets NPV to zero assuming reinvestment at the IRR

Answer

The arithmetic mean of annual project returns

Answer

The IRR adjusted for the effects of inflation

Question 3

The Adjusted Present Value (APV) method of project appraisal differs from NPV because it:

Accepted Answer

Separates the base-case NPV (all-equity financed) from the present value of financing side-effects

Answer

Discounts all cash flows at the WACC to incorporate financing effects

Answer

Uses the equity beta to discount operating cash flows

Answer

Ignores the interest tax shield when evaluating projects

Question 4

When using CAPM to derive a project-specific discount rate using a proxy company's beta, which procedure is correct?

Accepted Answer

Ungear the proxy company's equity beta, then regear it using the investing company's capital structure

Answer

Apply the proxy's geared equity beta directly to the new project

Answer

Use the risk-free rate as the project discount rate to be conservative

Answer

Average the proxy company's beta with the investing company's beta

Question 5

A firm has asset beta (ungeared) of 0.80, a debt-to-equity ratio of 1:1 by market values, and a tax rate of 25%. What is the equity beta?

Accepted Answer

1.40

Answer

0.80

Answer

1.60

Answer

1.20

Question 6

In real options analysis, a 'growth option' is best described as:

Accepted Answer

The right to expand operations if early results prove favorable

Answer

The right to abandon a project if performance deteriorates

Answer

The right to defer an investment decision to gather more information

Answer

The right to switch inputs or outputs in response to price changes

Question 7

Which of the following is the most significant limitation of the payback period as an investment appraisal technique?

Accepted Answer

It ignores the time value of money and disregards cash flows occurring after the payback date

Answer

It is computationally complex and difficult to apply

Answer

It requires detailed forecasts of future inflation rates

Answer

It cannot distinguish between mutually exclusive projects of equal cost