Senior Secondary (HKDSE) · Business, Accounting and Financial Studies

Capital Investment Appraisal : Practice Questions

2 multiple-choice questions marked as you go, and 4 written questions with worked solutions. All on Capital Investment Appraisal .

6 questions20 marksFree, no account

Question 1

1 mark

A company is evaluating two mutually exclusive projects, Project X and Project Y. Project X requires an initial investment of $$500,000$$ and is expected to generate net present values (NPV) of $$70,000$$ at a $$10\%$$ discount rate. Project Y requires an initial investment of $$400,000$$ and is expected to generate NPV of $$90,000$$ at the same $$10\%$$ discount rate. Both projects have a lifespan of 5 years. Based solely on the NPV method, which project should the company choose?

Question 2

1 mark

A project has an initial investment of $$100,000$$ and is expected to generate net cash inflows of $$30,000$$ in Year 1, $$40,000$$ in Year 2, and $$50,000$$ in Year 3. What is the payback period for this project?

Question 3

2 marks

What does a project's Net Present Value (NPV) of $$-HK\$50,000$$ signify for a company's investment decision?

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Question 4

4 marks

Explain one significant limitation of the payback period method and one key advantage of the Net Present Value (NPV) method when appraising capital investment projects.

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Question 5

5 marks

Explain two reasons why the Net Present Value (NPV) method is generally considered superior to the Payback Period method for capital investment appraisal.

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Question 6

7 marks

Eco-Clean Solutions Ltd. manufactures environmentally friendly cleaning products. The company is evaluating the purchase of a new automated bottling machine, 'Machine A', which is expected to increase production efficiency. The relevant details are as follows:

Initial Investment: $HK\$480,000$
Expected Useful Life: 4 years
Estimated Net Cash Inflows:
Year 1: $HK\$150,000$
Year 2: $HK\$180,000$
Year 3: $HK\$160,000$
Year 4: $HK\$140,000$
Salvage Value at the end of Year 4: $HK\$40,000$

The company's cost of capital is 10%.

Present Value Factors at 10%:
Year 1: 0.909
Year 2: 0.826
Year 3: 0.751
Year 4: 0.683

(a) Calculate the Payback Period for Machine A.

(b) Calculate the Net Present Value (NPV) of Machine A.

(d) State and briefly explain one non-financial factor that Eco-Clean Solutions Ltd. should consider before making the final investment decision.

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