Class Test 1

Project Appraisal & Financing

Prof Pradip Lath

10 Marks (Class Test-1)

1) It is usually notices that the cost of debt is cheaper compared to equity mainly due to 2 factors:

a. The interest rate is usually less than the return expected by the equity investor &

b. The interest on debt funds is tax deductable and thus the benefit of taxation accrues to the investors

i. A only

ii. B only

iii. A & B both

iv. None of the above

2) In the case of total funds method of cash flow, the initial investment outlay comprises:

a. Equity & Long Term Finance

b. Equity & Short Term Finance

c. All funds brought in by the lenders (both short term & long term loans)

d. Equity funds, Long term finance & Short term Finance

3) The treatment of salvage value of fixed assets in 3 different basis of cash flows as discussed is:

a. Same for all the basis

b. Different in all the 3 basis of cash flows

c. Same only for long term & total funds but different for equity basis

d. Same only for equity basis and long term funds method and different for total funds method

4) In the case of replacement model, the amount of additional depreciation due to the new machine would result in increase in cash flow by:

a. Same amount

b. Depreciation * tax rate

c. Depreciation * (1 – Tax Rate)

d. No change in cash flows

5) In the case of equity basis of cash flows, the annual operating cash flow would include:

a. Profit after tax + Depreciation

b. Profit before tax + Depreciation

c. Profit after tax + all non cash expenses

d. Profit before tax + all non cash expenses

6) For the computation of final cash flows as per long term funds method in the operating period, the changes in the final equity cash flows are as follows:

a. Add interest on Term Loan (LT finance)

b. Add interest on LT finance (1-t)

c. ‘a’ + Installment of term loan

d. ‘b’ + Installment of term loan

e. ‘a’ - Installment of term loan

f. ‘b’ - Installment of term loan

7) In a case of Replacement model of machine / equipment, the cash flows from the salvage value of the new Vs old items in the terminal year would be:

a. Difference in the salvage value of the new machine less old machine as inflows

b. Salvage value of the new machine as cash inflows

c. Salvage value of the old machine as cash inflows

d. None of the above

8) Margin money for working capital is a

a. Capital (Fixed Assets) investments in the project

b. Component of total cost of the project as per long term funds

c. Investment in the current assets of the project

d. Both ‘a’ & ‘b’

e. Both ‘b’ & ‘c’

9) The treatment of release of working capital (current assets less current liabilities) in the terminal year in the three different basis of cash flows as discussed is:

a. Same for all the basis

b. Differently in all the 3 basis of cash flows

c. Same only for long term & total funds and different for equity basis

d. Same only for equity basis and long term funds method and different for total funds

10) Repayment of the term finance would be ……… from the operating cash flows in the case of equity basis of cash flows:

a. Added

b. Deducted

c. No change

d. Only interest amount would be added

e. Only interest (1-t) to be added

Answers: 1-C, 2-D, 3-A, 4-B, 5-C, 6-D, 7-A, 8-E, 9-D, 10-B