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Subject P2: Advanced Management Accounting

10.9 Fill in the missing words in the following paragraph, options include:

NPV Payback

IRR ARR

An absolute measure is required – use ________________

The company’s primary objective is to maintain short term liquidity – use
________________

It is essential that all cashflows over the life of the project are taken into account
– use ________________

The company’s cost of capital cannot be readily identified – use ___________

Profit estimates cannot readily be converted into cashflows – use __________

10.10 A project consists of an initial outflow followed by several years of inflows. The
IRR of the project is to be approximated by interpolation based on the project’s
NPV at two different discount rates.

What will be the impact of the two NPVs chosen on the reliability of the
IRR calculated? Options include:

underestimate the IRR overestimate the IRR

Using two positive NPVs will ________________

Using two negative NPVs will ________________

Using one positive NPV and one positive NPV will ________________

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