Investment Decisions

Amounts are Rs lakh and ordinary share counts are lakh shares unless stated otherwise. 30 original practice MCQs, 2 marks each. Practice and separate-test stems differ. Standalone drills across the chapter, with a separate case-based test pack.

Original practice, not official ICAI questions or suggested answers. Scores are temporary and not synced to Study Hub. Contract/current-rule/accounting/tax boundaries are included in the review pack.

Not scored yet.

FM-C07-P001 · 2 marks

Which is a sound capital investment objective?

A. Highest percentage return always regardless of scale. B. Incremental risk-adjusted value subject to feasibility and constraints. C. Fastest advertised payback alone. D. Largest accounting revenue regardless of costs.

Explanation

Correct answer B: Incremental risk-adjusted value subject to feasibility and constraints.

Use dated incremental cash flows and the appropriate value/risk test.

FM-C07-P002 · 2 marks

Installing one of two incompatible machines prevents installing the other. Type?

A. Only a sunk cost. B. A cash dividend decision. C. Independent projects always both accepted. D. Mutually exclusive projects.

Explanation

Correct answer D: Mutually exclusive projects.

One acceptance excludes the other.

FM-C07-P003 · 2 marks

A nonrefundable study fee 2 lakh was paid before the present decision. Treatment?

A. Exclude it from incremental present project cash flows. B. Erase its historical accounting record. C. Add it again to time 0 cash. D. Treat it as future salvage.

Explanation

Correct answer A: Exclude it from incremental present project cash flows.

Already incurred and unaffected by the decision.

FM-C07-P004 · 2 marks

Owned land could sell now for 12 lakh net of taxes/costs. Project uses it. Relevant initial cost?

A. Historical price only. B. Zero because already owned. C. 12 lakh foregone net sale. D. An automatic depreciation tax shield.

Explanation

Correct answer C: 12 lakh foregone net sale.

Using land sacrifices the alternative disposal proceeds.

FM-C07-P005 · 2 marks

Allocated head-office charge is unchanged, but extra supervision.8 lakh arises only with project. Treatment?

A. Exclude all overhead always. B. Ignore supervision because called overhead. C. Exclude unchanged allocation, include incremental.8 at its date/tax terms. D. Include both allocations as actual extra cash.

Explanation

Correct answer C: Exclude unchanged allocation, include incremental.8 at its date/tax terms.

Incremental cash change matters, not label.

FM-C07-P006 · 2 marks

Sales 80, cash costs 45, tax depreciation 10 lakh, tax 25%. OCF with usable immediate deductions?

A. 18.75 lakh PAT only. B. 38.75 lakh double depreciation. C. 35 lakh pre tax cash. D. 28.75 lakh.

Explanation

Correct answer D: 28.75 lakh.

EBIT 25, PAT 18.75 plus 10.

FM-C07-P007 · 2 marks

EBIT 20, depreciation 5, interest 4 lakh, tax 25%, WACC unlevered appraisal. OCF?

A. 17 lakh PAT plus depreciation, omitting after-tax interest. B. 20 lakh. C. 12 lakh PAT only. D. 21 lakh adding full interest.

Explanation

Correct answer B: 20 lakh.

PAT 12+after-tax interest 3+depreciation 5.

FM-C07-P008 · 2 marks

Asset 90, installation 10, WC 12, old sale 15 net all taxes/costs; study 2 sunk. Initial relevant outlay?

A. 112 lakh ignoring sale. B. 97 lakh. C. 85 lakh omitting WC. D. 99 lakh adding sunk fee.

Explanation

Correct answer B: 97 lakh.

90+10+12-15.

FM-C07-P009 · 2 marks

Operating cash 25, end year 1 WC increase 4 lakh. Net year 1 project cash?

A. 4 lakh only. B. 21 lakh. C. 25 lakh ignoring WC. D. 29 lakh reversing WC sign.

Explanation

Correct answer B: 21 lakh.

Increase in WC uses cash.

FM-C07-P010 · 2 marks

Final OCF 20, sale 18, taxbook 12, tax 30% gain rule, WC 7 release, disposal fee 2 immediately deductible. Terminal net?

A. 43.2 lakh omitting disposal fee. B. 29.8 lakh excluding OCF. C. 41.8 lakh. D. 47 lakh ignoring tax/fee.

Explanation

Correct answer C: 41.8 lakh.

20+(18-1.8)-1.4+7.

FM-C07-P011 · 2 marks

Tax asset 100, 20% WDV for 3 years. Opening year 4 taxbook?

A. 40 lakh straight-line assumption. B. 80 lakh first year only. C. 48.8 lakh depreciation total. D. 51.2 lakh.

Explanation

Correct answer D: 51.2 lakh.

100 x.8^3.

FM-C07-P012 · 2 marks

Initial 100, yearend receipts 30/40/50. Actual recovery date under strictly yearend timing?

A. Never recovers. B. End year 3; 2.6 needs a different uniform-third year assumption. C. End year 2. D. Exactly 2.6 years under all timing patterns.

Explanation

Correct answer B: End year 3; 2.6 needs a different uniform-third year assumption.

70 recovered by year 2; receipt 50 arrives end year 3.

FM-C07-P013 · 2 marks

Initial 100, 40 at yearend for 4 years, 10%. Conventional discounted within year interpolation?

A. 2.5 years ordinary cash shortcut. B. No recovery because first 3 PV below 100. C. 3 years exactly. D. About 3.01925 years; strict yearend recovery 4 years.

Explanation

Correct answer D: About 3.01925 years; strict yearend recovery 4 years.

PV first 3=99.47408; remainder / year 4 PV 27.32054.

FM-C07-P014 · 2 marks

Asset 100, salvage 20, life 4, profit before dep 40/year, tax 25%, straight-line 20 dep. ARR on initial asset 100?

A. 25% average asset basis. B. 35% using OCF. C. 15%. D. 40% before depreciation/tax.

Explanation

Correct answer C: 15%.

Average PAT 15/initial 100.

FM-C07-P015 · 2 marks

Same asset 100/salvage 20, annual PAT 15, WC 10 held full. ARR on average capital including WC?

A. 21.4286%. B. 13.6364% initial total basis. C. 15% initial asset basis. D. 25% excludes WC.

Explanation

Correct answer A: 21.4286%.

15/[(100+20)/2+10].

FM-C07-P016 · 2 marks

Outlay 100, cash 45 yearend for 3 years, 10%. NPV?

A. -11.90834 lakh reversed sign. B. 35 lakh ignoring time value. C. 11.90834 lakh. D. 111.90834 lakh PV only.

Explanation

Correct answer C: 11.90834 lakh.

45 PVAF(10%, 3)-100.

FM-C07-P017 · 2 marks

Same outlay 100/PV future cash 111.90834. PI?

A. 1.1190834. B. .893588. C. 11.90834. D. .1190834 NPV per cost.

Explanation

Correct answer A: 1.1190834.

PV inflows divided by outlay.

FM-C07-P018 · 2 marks

PDF page 66 outlay 80/PV inflows 97.922 prints a reversed sign line. Standard NPV?

A. 1.224025 lakh. B. -17.922 lakh as positive-value definition. C. +17.922 lakh, preserving printed sign discrepancy. D. 177.922 lakh.

Explanation

Correct answer C: +17.922 lakh, preserving printed sign discrepancy.

Standard NPV=PV inflows-outflows.

FM-C07-P019 · 2 marks

Mutually exclusive A 50 now/70 year 1, B 100 now/130 year 1, 10%, no capital limit. Which has greater NPV?

A. B 18.1818 versus A 13.6364, though A has higher PI/IRR. B. Neither positive NPV. C. Both equal NPV. D. A must win because PI 1.2727 is larger.

Explanation

Correct answer A: B 18.1818 versus A 13.6364, though A has higher PI/IRR.

Absolute value and relative efficiency can conflict.

FM-C07-P020 · 2 marks

Initial 100, 50 cash at each yearend for 3 years. Exact numerical IRR?

A. 50% one-year shortcut. B. 10%. C. 18.2858% MIRR at 10%. D. About 23.3752%.

Explanation

Correct answer D: About 23.3752%.

Root of -100+50 PVAF(r, 3)=0.

FM-C07-P021 · 2 marks

Two-rate IRR linear interpolation is which?

A. An approximation requiring NPV/root checks. B. An accounting return. C. A guarantee of actual reinvestment terms. D. Always exact for any multi year stream.

Explanation

Correct answer A: An approximation requiring NPV/root checks.

NPV is curved in the discount rate.

FM-C07-P022 · 2 marks

Cash[-100, 230, -132]at 0/1/2. IRRs?

A. Only 20% by rule. B. 15% because midway. C. Only 10% by rule. D. 10% and 20%, not one automatically chosen largest root.

Explanation

Correct answer D: 10% and 20%, not one automatically chosen largest root.

Polynomial in 1+r has roots 1.1 and 1.2.

FM-C07-P023 · 2 marks

Flows[-100, 50, 50, 50], finance/reinvestment 10%. MIRR?

A. 18.2858%. B. 23.3752% IRR. C. 10% by definition. D. 65.5% total growth as annual.

Explanation

Correct answer A: 18.2858%.

FV 165.5/PV 100 to 1/3 power minus 1.

FM-C07-P024 · 2 marks

Flows[-100, 230, -132], finance 10%, reinvest 8%. PV negative cash denominator?

A. 232 lakh un discounted. B. 209.0909 lakh. C. 100 lakh ignoring future outflow. D. 132 lakh only.

Explanation

Correct answer B: 209.0909 lakh.

100+132/1.1^2.

FM-C07-P025 · 2 marks

Budget 100; A cost 60/NPV 30, B 50/26, C 50/25 independent indivisible. Best feasible package?

A. A+B at cost 110. B. A because highest single NPV. C. All three at cost 160. D. B+C, NPV 51 at cost 100.

Explanation

Correct answer D: B+C, NPV 51 at cost 100.

Enumerate feasible whole-project combinations.

FM-C07-P026 · 2 marks

Budget 80; same A 60/30, B 50/26, C 50/25 perfectly divisible linear. Maximum NPV?

A. 51 ignoring budget. B. 41 via all B and 30 cost of A or C. C. 26 because cannot split despite given divisibility. D. 30 largest individual NPV.

Explanation

Correct answer B: 41 via all B and 30 cost of A or C.

B efficiency.52, remaining.50.

FM-C07-P027 · 2 marks

Equivalent annual value comparison for unequal-life repeat projects needs what?

A. Compatible service/risk and justified repeatability/common horizon. B. No discount rate. C. Only longest life always wins. D. Automatic identical future renewals regardless of facts.

Explanation

Correct answer A: Compatible service/risk and justified repeatability/common horizon.

Annual is ation should not invent replacement opportunities.

FM-C07-P028 · 2 marks

New cost 60, WC 5; old sale 24/taxbook 12, tax 25% gain rule. Initial replacement cash?

A. -44 lakh. B. -32 using taxbook as cash. C. -41 ignoring gain tax. D. -65 ignoring old proceeds.

Explanation

Correct answer A: -44 lakh.

Net old 21; -60-5+21.

FM-C07-P029 · 2 marks

Inflation 5%, nominal discount 15.5%. Consistent real rate?

A. 10.5% subtracting without Fisher compounding. B. 10%. C. 20.5%. D. 15.5%.

Explanation

Correct answer B: 10%.

1.155/1.05-1.

FM-C07-P030 · 2 marks

PV future cash 80/110/140, probabilities.25/.5/.25, outlay 100. Expected NPV?

A. 0 because downside exists. B. 40 lakh maximum only. C. 10 lakh, not a guarantee of realised cash. D. 110 lakh expected PV as NPV.

Explanation

Correct answer C: 10 lakh, not a guarantee of realised cash.

Expected PV 110 minus 100.