F9 MCQ question test

Hi Ina,

I just did this and I believe it is 16.67.

This is how I did it.

Avg profit / avg investment x 100

So first average investment is 160,000 + 20,000 / 2 = 90,000

Avg profit = Total cash – (Investment – residual)

Total cash = 200,000 (40+60+80+20) These are net so no need to do dicount factor again i believe.

Investment – residual = 160,000 – 20,000 =140,000

Hence Avg profit = 200,000 – 140,000 = 60,000

Divide by 4 years to get average is 60/6= 15,000

So ARR = 15000/ 90000 = 16.67 %

Cost $160,000. It has an expected life of 4 years and an expected scrap value of $20,000. The anticipated net operating cash flows each year are as follows:

Year 1: 40,000
Year 2: 60,000
Year 3: 80,000
Year 4: 20,000

The cost of capital is 10% p.a.

What is the Accounting Rate of Return (ARR) of the investment?

1. 9.38%
2. 16.67%
3. 55.56%
4. 21.43%

And how it was calculated?

@johnmoffat said:
Question 1:

This is a ‘simple discount’ question.

The discount is 1/99 = 1.010101% over a period of 25 days (40 – 15)

To turn it into a yearly rate, if r is the yearly rate then 1+ r = 1.010101^(365/25)
r = 0.1580 or 15.80%

Hi John – I think I am doing something wrong here as I get 0.1474 for 1+r! What’s up with that then?

jilith: It is difficult for me to help without seeing your calculator. Are you using brackets to calculate 365/25?

Mohamed:

1: current assets must be 2.4 x 2.5M = 8M
So receivables must be 8 – 0.5 – 1 = 6.5M
So receivables days = 6.5/50 x 365 = 47.45

2: Share price at the start of the year was 4.6 (5.2 – 0.6)
Returns for the year = divi of 0.45 + growth in share price of 0.6 = 1.05
So return = 1.05/4.6 = 22.83%

2.4*2.5= 6 but it is my lack of concentration while i was solving it, thanks a lot 🙂

Hi All,

Just incase a tutor cannot help me with this the at moment could any of your explain the following?:

1) A company has sales of $200m per year. Receivable days are currently 40 days. Company are considering offering a 1% discount for payment within 15 days. 60% of customers are expected to take advantage of the discount. What is the effective annual cost of the discount? Answer: 15.8%….I have seen your working for this but keep on getting a different answer even when I am using brackets.

2) A company are considering investing in a new project which will cost $160,000 and have an expected life of 4 years and expected scrap value of $20,000. Anticipated net operating cash flows each year will be:

Year 1: $40,000
Year 2: $60,000
Year 3: $80,000
Year 4: $20,000

The cost of capital is 10%. What is the ARR? Answer: 16.67%

3) A company has 3 projects with the following initial costs and NPV’s

Project A: $20,000 NPV: $2,000
Project B: $30,000 NPV $2,400
Project C: $10,000 NPV $1,200

Capital available for investment is $40,000. Projects are divisible. What is the max NPV? Answer: $4,000

4) A company has just paid a dividend of $0.23/share. Shareholders are expecting the dividend to remain at $0.23/share next year but to increase at an average rate of 3% per annum there after. Shareholders required return is 12% and the rate of corporation tax is 25%. What will be the current market value per share? Answer $2.56

Many Thanks,

David

Thanks John.