Question 1

A project has a positive net present value (NPV) when discounted at a company's weighted average cost of capital (WACC). The project has also been evaluated using a range of other investment appraisal techniques.It has now been recognized that the project is of much higher risk than the average risk of the company's existing portfolio of projects. It has therefore been decided that the discount rate to be used when evaluating this project should be the WACC adjusted for risk.As the result of changing the discount rate as described, which of following statements are correct?Select ALL that apply.

Options :

A : The net present value would decrease.

B : The internal rate of return would decrease.

C : The accounting rate of return would decrease.

D : The internal rate of return would remain unchanged.

E : The profitability index would remain unchanged.

F : The net present value would increase.

Answer: A,D

Question 2

A manufacturing company has recently introduced a Total Quality Management (TQM) system. The company has invested heavily in the education and training of its staff, in addition to implementing new product design engineering. There is a plan to sample units from each batch of products manufactured to test for errors, although this has not yet been implemented due to budget constraints.The company is experiencing high levels of customer complaints, with many faulty units being returned by the customer for refund or replacement. Sales revenue has fallen recently, mainly due to negative press coverage linked to dissatisfied customers.Select the statement MOST likely to apply.

Options :

A : The high level of external failure costs is the result of a lack of expenditure on prevention costs.

B : The high level of internal failure costs is the result of a lack of expenditure on appraisal costs.

C : The high level of external failure costs is the result of a lack of expenditure on appraisal costs.

D : The high level of internal failure costs is the result of a lack of expenditure on prevention costs.

Answer: C

Question 3

GHY has two subsidiaries. GHY-Motor manufactures car engines and GHY-Build designs and assembles cars. In the car industry it is common for manufacturers to buy parts, including engines, from other manufacturers.GHY has granted GHY-Motor and GHY-Build full autonomy. GHY-Build is considering using an engine from another company for a new model that it is designing. GYY-Motor has a suitable engine, but it charges more than GHY-Build's preferred supplier.Which of the following statements is correct? Select ALL that apply.

Options :

A : GHY should consider permitting GHY-Motor to charge part of the selling price on engines sold to GHY-Build to head office.

B : Forcing GHY-Motor to grant a discount to GHY-Build could lead to dysfunctional behavior.

C : There could be significant non-financial issues associated with GHY-Build-s decision to buy another engine.

D : Parent companies should never grant subsidiaries full autonomy on matters such as intra-group sales.

E : The threat of dysfunctional behavior is largely theoretical and managers can be trusted to maximise shareholder wealth.

Answer: A,B,C

Question 4

In order to remain competitive an organization wishes to achieve cost savings for one of its existing products.Which of the following correctly describes methods which the organization can use to achieve these cost savings?Select ALL that apply.

Options :

A : Functional analysis is carried out only on existing products and is concerned only with minimizing the cost of the originally defined functions of a product.

B : Value engineering is a fundamental rethinking and radical redesign of an organization-s existing processes.

C : Target costing is continuously setting new stretch targets while the product is in production.

D : Value analysis is examining a product-s costs in order to achieve its purpose at a reduced cost while maintaining its reliability and quality.

E : Kaizen costing is seeking to make cost savings by continuously making small incremental cost reductions while the product is in production.

Answer: A,D

Question 5

One of an investment centre's products is sold on an external market. Output is limited because the specialist machine that manufactures the product is operating at full capacity.

Current data for the product are as follows.

Options :

A : $21,400

B : $17,800

C : $23,900

D : $26,160

Answer: A

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