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Investment appraisal MCQ

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Investment appraisal MCQ

  • This topic has 5 replies, 3 voices, and was last updated 3 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • August 27, 2020 at 6:17 pm #582378
    anushka151
    Participant
    • Topics: 9
    • Replies: 4
    • ☆

    Question: The lower risk of a project can be recognised by increasing which of the following?
    Answer: B) The estimates of future cash inflows from the project.

    I don’t quite understand the reasoning behind this answer, can you explain this please? Thanks so much!

    August 28, 2020 at 8:37 am #582432
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54670
    • ☆☆☆☆☆

    Where did you find this question?

    The future cash flows are always only estimates and there is the risk that they may be different.

    If a project is more risky it is better to assume lower cash flows. If it is less risky than we can estimate higher flows.

    However this is not something we normally do which it was surprises. me about this question. It would have been helpful if you could have typed out the whole question because presumably this is the most sensible of the choices available.

    August 28, 2020 at 9:10 am #582450
    anushka151
    Participant
    • Topics: 9
    • Replies: 4
    • ☆

    I found it in the Kaplan Exam Kit (it is an older one tho, valid till June 2018)

    Question: The lower risk of a project can be recognised by increasing which of the following?

    A) The cost of the initial investment of the project
    B) The estimates of future cash inflows from the project
    C) The internal rate of return of the project
    D) The required rate of return of the project

    Ans – B

    August 28, 2020 at 9:20 am #582457
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54670
    • ☆☆☆☆☆

    B is the answer, partly for the reason I gave before (even though it would be an unusual thing to do) but also because the others cannot possibly be correct.

    The initial cost is the one thing we will be certain about.

    The internal rate of return is completely irrelevant to the risk

    Increasing the required rate of return is what we would do if there was higher risk, not lower risk.

    May 8, 2022 at 8:40 am #655174
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    Sir why is the IRR irrelevant to risk?

    May 8, 2022 at 5:00 pm #655203
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54670
    • ☆☆☆☆☆

    The IRR is the rate of interest that gives a NPV of zero. It is not something that we can change.

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