PRO19-P03-1 Certification Exam Questions with AI Explanations

QUESTION: 51

B is a horticultural retailer with limited funds available to acquire new retail property. B's Finance Manager has analysed two potential property investments. Investing in property P shows an IRR of 21% while the IRR on property Q is 17%.
The Finance Manager has also advised that the NPV for property P is $750K, while the NPV of property Q is $850K.
The Board needs to choose between the two properties as it has insufficient funds for both. Based purely on the Finance Manager's analysis, which of the following is true?

Premises P is clearly better than property Q in all respects.
Premises Q is clearly better than property P in all respects.
Board members who wish to maximise return on capital employed will want property P while those who wish to maximise shareholder wealth will want property Q.
Board members who wish to maximise return on capital employed will want property Q while those who wish to maximise shareholder wealth will want property P.

Answer(s): C

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QUESTION: 52

RFD, a listed company, is considering making an investment in a risky new venture. RFD has a substantial cash surplus that will be used to acquire the necessary resources. It is unlikely that RFD would have been able to raise finance for this investment because the company is already highly geared.
Which of the following statements about stakeholders' conflicting interests are true?

RFD's shareholders are exposed to the systematic risk from this project and the directors are exposed to total risk.
RFD's lenders are likely to suffer a greater risk than RFD's equity investors.
Neither RFD's shareholders or lenders are likely to have the means to prevent the directors from making this investment.
RFD's existing employees are likely to enjoy a significant upside risk from this project.
The diversification of RFD's interests will reduce the risks for all stakeholders.

Answer(s): A,B,C

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QUESTION: 53

JHU has recently completed an eight year project. The project was evaluated at a discount rate of 10% and was accepted because the net present value was $18 million. In year 3 of the project there was a significant unexpected repair arising because of the implementation stage of the project was rushed and some checks on equipment were skipped to save time. The cost of this was $8 million.
In year 8 of the project the costs of dismantling the project were $11 million more than anticipated because of unexpected changes to the law concerning disposal of industrial scrap. How should these findings be reflected in the post completion audit?

Poor project management cost the entity $6 million, to the nearest million.
Poor project management cost the entity $11 million, to the nearest million.
Poor project management cost the entity $5 million, to the nearest million.
Poor project management cost the entity $16 million, to the nearest million.

Answer(s): A

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QUESTION: 54

M built a large factory last year and it has just been completed. The initial outflows on this project have a present value of $400 million and the entire project has a net present value of $30 million. The initial phase of the project caused problems and there was an overspend of $35 million as there was unstable soil. The foundations had to be underpinned with large steel bars to ensure the building would be safe. There was no other suitable site for the project. The construction could not be abandoned as the site would have had very little commercial value. The Internal Audit department has been asked to carry out a post completion audit. What issues should it concentrate on?

The audit should consider the initial survey report when the land was purchased to see if the survey mentioned the unstable soil.
The audit should look at documentation to ensure proper procedures were followed at all stages of the project.
The audit should consider what lessons could be learned for future projects.
The audit should find out who was to blame for the project being over budget.
The audit should consider whether it should have built the factory without underpinning and sold it on quickly.

Answer(s): A,B,C

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QUESTION: 55

DRAG DROP
A's directors do not believe that they always get value for money from their investment in capital projects. Over the past decade the company has invested in 55 projects that have cost more than $1m. They are considering introducing a system of post completion audit to see if this will help them to understand any problems they have had with projects in the past. They hope to use the results of the post completion audits to significantly improve the results of their capital investments State whether you agree or disagree with the points raised by A's directors.