2 - Investment Appraisal

Question 1

Present value of a single cash flow

Answer 1

CF x 1/(1+r)^n

Question 2

Present value of a growing perpetuity

Answer 2

CF at t1 x 1/(r-g)

Question 3

Shortcut to calculate Discount Factor t3-7

Answer 3

DF t3-7 = DF t1-5 x DF t2

Question 4

Calculate DF with a change in discount rate:

Year 1 = a%
Year 2 = b%

Answer 4

DF t2 = 1/(1+a) x (1+b)

Question 5

Calculate discount rate when real rate is given

Answer 5

(1+m) = (1+r)(1+g)

Where:

r = real rate
g = general inflation
m = money rate

Question 6

Profitability index of a project

Answer 6

PI = NPV / investment at time of rationing

Question 7

If asset is bought on last day of the tax year, when does tax relief start?

Answer 7

T0

Question 8

What are the 4 steps for assessing Replacement decisions?

Answer 8

Step 1: Calculate NPV per economic cycle
Step 2: Calculate equivalent annual cost per NPV (NPV/Annuity factor)
Step 3: Choose the option with the lowest -ve NPV
Step 4: Discuss assumptions

Question 9

3 step approach for Divisible projects

Answer 9

Step 1: Calculate profitability index (PI) per project
PI = NPV/investment at time of rationing

Step 2: Rank the projects based on PI

Step 3: Allocate finds until all money used

Question 10

7 value drivers of Shareholder Value Analysis

Answer 10

• Increase Sales growth rate
• Increase Length of project
• Increase Operating margin
• Reduce Working capital
• Reduce Cost of capital
• Reduce Acquisitions
• Reduce Tax paid

Question 11

Real options of investment appraisal

Answer 11

• Follow on options
• Abandonment options
• Timing options
• Growth options