NATIONAL OPEN UNIVERSITY OF NIGERIA
14/16 AHMADU BELOW WAY, VICTORIA ISLAND, LAGOS
SCHOOL OF MANAGEMENT SCIENCES
MARCH 2014 EXAMINATION
COURSE CODE: BHM 713 CREDIT UNIT: 2
COURSE TITLE: CAPITAL INVESTMENT AND FINANCIAL DECISIONS
TIME ALLOWED: 2 hrs
Instructions: 1. Attempt question Number one (1) and any other two (2).
2. Question number 1 is compulsory and carries 30 marks, while the other
questions carry equal marks each.
3. Present all points in a coherent and orderly manner
QUESTION 1
1a) What are the features of investment 10 Marks
1b) Bola Plc is considering the following three projects whose associated cash flows are given thus:
| YEAR | PROJECT A | PROJECT B | PROJECT C |
| N’000 | N’000 | N’000 | |
| 0 | -500,000 | -500,000 | -500,000 |
| 1 | 100,000 | 150,000 | 200,000 |
| 2 | 150,000 | 250,000 | 250,000 |
| 3 | 250,000 | 300,000 | 300,000 |
| 4 | 500,000 | 300,000 | 450,000 |
Required: Calculate the payback periods for each of the projects and advice Bola Plc accordingly. 15 Marks
1c) Explain compound interest. 5 Marks
QUESTION 2
2a) Discuss fully the term ‘relevant cost 8 Marks
2b) What are the components of cash flows according to Lucey (1988) 7 Marks
2c) Give the basic definition of Accounting Rate of Return (ARR) and the other
variants that exist. 5 Marks
QUESTION 3
3a) Explain the following terms 8 Marks
I. Single period capital rationing.
II. Multi-Period Capital rationing
III. Divisible projects
IV. Indivisible projects
3b) Give brief explanations of the following terms 2 Marks each
· Differential Costs
· Incremental Cost
· Committed Costs
· Notional (Imputed) Costs
3c) Today, Uche purchased an annuity of N250, 000 per year for 15 years from an insurance company, which uses 3% compound annually. If the first payment is due in one year, what did the annuity cost him? 4 Marks
QUESTION 4
4a) Modern Tech Services Ltd is considering two alternative projects for a business expansion programme in the Northern part of the country. The projects have the following Naira cash flow profiles according to the data supplied by the company’s accountant:
| Year | Project I | Project II |
| 0 | -1 Million | -3 Million |
| 1 | -2 Million | 0.20 Million |
| 2 | -95 Million | -50 Million |
| 3 | 0.85 Million | 0.65 Million |
| 4 | 0.78 Million | 0.75 Million |
| 5 | 0.62 Million | 0.80 Million |
| 6 | 0.40 Million | 1.90 Million |
| 7 | 0.10 Million | 0.20 Million |
Required:
a. Calculate the payback period for each project 8 marks
b. Based on payback periods, advice which of the two projects should be chosen 1mark
4b) List three advantages and three disadvantages of Sensitivity Analysis 6 Marks
4c) How does incremental cost differ from differential cost? 5 Marks
QUESTION 5
5a) What are the two ways identified for the treatment of sensitivity analysis? 5 Marks
5b) What is the weakness of sensitivity analysis? 5 Marks
5c) List 10 methods of incorporating uncertainty and risk when appraising projects 10 Marks
For the 2015 – till date past questions for this course CLICK HERE
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