DRAG DROP

Place the correct quality cost classification against each cost described below.

Select and Place:

A machine requires an initial investment of $500,000. The net present value (NPV) of the investment in the machine is $36,500. Which of the following statements is correct in relation to the sensitivity of the investment?

A. The initial investment can increase by no more than 7.3% before the project is not viable.

B. The NPV can decrease by no more than 7.3% before the project is not viable.

C. The initial investment can increase by no more than 13.7% before the project is not viable.

D. The NPV can decrease by no more than 13.7% before the project is not viable.

In an inflationary environment which is the correct way of calculating net present value (NPV)?

A. Using nominal cash flows and a nominal discount rate.

B. Forecasting the cash flows including the effect of inflation and then using a real discount rate.

C. Using real cash flows and a nominal discount rate.

D. Forecasting the cash flows excluding the effect of inflation and then using a nominal discount rate.

A company operates a divisional structure. The manager of division D receives a bonus based on the division's annual return on capital employed (ROCE).

A minimum ROCE of 20% must be achieved to receive any bonus and thereafter the bonus increases in line with increases in ROCE.

This year division D achieved a ROCE of 24% and the divisional manager received a large bonus. The manager is considering an investment in a new machine for next year. The incremental ROCE earned by the machine is expected to be

19% although the ROCE for the division as a whole with the machine is expected to be 22%. Without the machine, ROCE is likely to be stable at 24%. The cost of capital for the company as a whole is 18% per year.

Which of the following statements is correct?

A. The manager will accept the investment because overall the division will earn a ROCE that exceeds the minimum target of 20%.

B. The manager will reject the investment because it will result in a lower bonus than without the investment.

C. The manager will accept the investment because it will earn a ROCE that is higher than the company's cost of capital.

D. The manager will reject the investment because it will result in the receipt of no bonus.

A company is investing $200,000 in a project which will generate a cash flow of $60,000 each year for five years starting immediately. The company's cost of capital is 7%. The net present value of the investment to the nearest $100 is:

A. $63200