Question 1

1 Capital investment appraisal is concerned with:&#10;A) The cost of salaries and weekly wages&#10;B) Producing the annual income and expenditure budget&#10;C) Expenditure on fixed assets&#10;D) None of the above

Accepted Answer

Capital investment appraisal is concerned with expenditure on items that are of long term value and use to a business such as buildings and equipment. These are also known as fixed assets and they appear as such on the balance sheet.

Question 2

2 Capital investment appraisal is carried out to:&#10;A) Test the financial viability of proposed projects&#10;B) Rank projects in order of preference when funds are limited&#10;C) Make the case to secure funding&#10;D) All of the above

Accepted Answer

All of a) b) and c) are good reasons for carrying out capital investment appraisal and illustrates the different but complementary uses of CIA.

Question 3

3 If a sport facility invests $25,000 in gym equipment and this generates cash flows of $10,000 per year for 5 years and has a residual value of $5,000, what is the project lifetime surplus?&#10;A) There is not enough information here to work it out&#10;B) $25,000&#10;C) $20,000&#10;D) $30,000

Accepted Answer

Investment = -$25,000 outflow, and there are inflows of $10,000 per year for 5 years ($50,000) and a further inflow of $5,000 at the end of the project. -$25,000 + $50,000 + $5,000 = $30,000.

Question 4

4 The traditional methods of capital investment appraisal are:&#10;A) Payback and Net Present Value&#10;B) Accounting Rate of Return and Internal Rate of Return&#10;C) Accounting Rate of Return and Payback&#10;D) Internal Rate of Return and Payback

Accepted Answer

The answer of 4 The traditional methods of capital investment...

Question 5

5 What is the principal limitation of the Payback method?&#10;A) It ignores the full life of projects&#10;B) It is too complicated for most people to understand&#10;C) There is no agreed methodology for calculating it&#10;D) Lenders of funds don't like it

Accepted Answer

The Payback method is commonly used because it is relatively simple to conduct and easily understood. It is however, only concerned with the point at which projects repay their initial investments and does not take into account the full life of a project.

Question 6

6 What will be the value of $1,000 invested in a bank account now if interest rates are 5% and the money is tied up for 5 years and interest is compounded?&#10;A) $1,000&#10;B) $1,250&#10;C) &#163;1,276&#10;D) Something less than $1,000

Accepted Answer

$1,000 invested at 5% compound will be worth $1,276 and we can prove this by the calculation: 1000 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 (or 1,000 x 1.05^⁵).

Question 7

7 Generally, how would $10,000 received in three years' time compare with $10,000 in your hand now?&#10;A) It's worth about the same&#10;B) It's worth less&#10;C) You can't tell from the data provided&#10;D) It's worth more

Accepted Answer

Money received in the future is worth less than the same amount of money in your hand now. For this reason we apply a discount factor to future cash flows which is less than 1.000. Multiplying any value by an amount which is less than 1.000 will make it smaller. Hence $10,000 in three years' time is worth less than $10,000 now.

Question 8

8 The Internal Rate of Return can be defined as:&#10;A) Getting your money back before the end of the project&#10;B) What you would get if you put your money in the bank&#10;C) The interest rate at which Net Present Value equals zero&#10;D) A modern way of saying Accounting Rate of Return

Accepted Answer

The Internal Rate of Return is a technique that is used to test the sensitivity of projects to fluctuations in interest rates. If we experiment with different interest rates we can find the rate at which the NPV = 0, this is the definition of the Internal Rate of Return.

Question 9

9 The main problem with discounting techniques such as Net Present Value and Internal Rate of Return is:&#10;A) They are not very popular with investors&#10;B) They only work for projects over $1 million&#10;C) They are expensive to carry out&#10;D) They are relatively complex such that many people do not understand them and therefore do not use them

Accepted Answer

NPV and IRR are straightforward calculations to perform if you have the necessary skills. Furthermore because they provide the most technically correct answers they are actually popular with investors. The problem is that because they look like complex techniques managers do not understand them or use them.

Question 10

10 When considering investment decisions which one of the following represents best practice:&#10;A) Use all five CIA methods to get a rounded view of a project&#10;B) Trust your gut instinct&#10;C) Get your family and friends to give you their opinions&#10;D) Analyse the business pages on websites and in newpapers

Accepted Answer

The purpose of this process is to use objective quantifiable methods and so a) is correct. Answers b), c) and d) are the subjective unscientific methods that we should not rely on initially when making investment decisions.

Question 11

11 Outline briefly why Capital Investment Appraisal is an important skill for sport facility managers.

Accepted Answer

The answer of 11 Outline briefly why Capital Investment Appraisal...

Question 12

What are the strengths and weaknesses of the five Capital Investment Appraisal techniques outlined in this chapter and how do we overcome the weaknesses?

Accepted Answer

The answer of What are the strengths and weaknesses of...

Question 13

In addition to the mechanics of performing Capital Investment Appraisal techniques what else to managers need to know to appraise a project?

Accepted Answer

The answer of In addition to the mechanics of performing...

Question 14

A manager is reviewing three competing projects of which only one can be funded. Some key statistics emerging from a Capital Investment Appraisal are shown in the table below. Which project should the manager recommend be funded?

\begin{array}{|l|c|c|c|}\hline & \text { Project A } & \text { Project B } & \text { Project C } \\\hline \text { Investment } & \$ 250,000 & \$ 230,000 & \$ 310,000 \\\hline \text { Payback } & 39 \text { months } & 33 \text { months } & 51 \text { months } \\\hline \text { NPV@13\% } & +\$ 70,000 & +\$ 62,000 & +\$ 58,000 \\\hline \text { IRR } & 22 \% & 19 \% & 15 \% \\\hline \text { Discounted Payback } & 48 \text { months } & 40 \text { months } & 62 \text { months } \\\hline\end{array}

Accepted Answer

The answer of A manager is reviewing three competing projects...

Deck 4: Capital Investment Appraisal