Question 1

Division A is an investment centre with assets of $7.3 million. The following is an extract from the annual budget for division A:

The cost of capital is 14%.
Calculate the residual income for division A.

Options :

A : $808,000

B : $1,727,800

C : $358,000

D : $2,008,000

Answer: A

Question 2

When considering a capital investment, relevant costs for decision making have which THREE of the following features?

Options :

A : They are future costs.

B : They are committed costs.

C : They are incremental costs.

D : They are unavoidable costs.

E : They are cash flows.

Answer: A,C

Question 3

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 4

An organization is competing in the high technology market. It sets a high sales price for its products initially to target the early adopters, and then the price is gradually reduced.
This pricing strategy is known as:

Options :

A : Market skimming

B : Penetration pricing

C : Premium pricing

D : Loss leader pricing

Answer: A

Question 5

A manufacturing company is in the process of introducing just in time (JIT) and total quality management (TQM) into every aspect of its value chain.
Which TWO of the following are appropriate changes to make to the support activities in the organization's value chain?

Options :

A : Inbound logistics would need to ensure that materials of appropriate quality are delivered on a just in time basis.

B : Operations would need to be carried out on a right first time basis as any failure could delay production.

C : After sales service would need to ensure that appraisal costs are kept to a minimum.

D : Procurement would need to arrange to purchase goods so that they are delivered as required.

E : Firm infrastructure would need to arrange appropriate training courses for staff.

F : Technology development would need to ensure that processes are continually improving.

Answer: A,D

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