EASTERN MEDITERRANEAN UNIVERISTY

FINA 521: INVESTMENT APPRAISAL

SAMPLE FINAL EXAM QYESTIONS

Name:____________________ Student Number:_________________

Please answer all questions. GOOD LUCK!!!

QUESTION
(a) (12 points) Explain the relationship between (i) cash receipts and sales, (ii) cash
expenditures and purchases, (iii) increases in the desired level of cash balances
and the net cash flow of project.
(b) (10 points) Please give at least three reasons why an organization would want to
carry out a post evaluation of a project? Explain.

QUESTION
(a) (5 points) For a given rate of inflation in Turkey, in what way will a higher rate of
inflation in the USA alter Turkey’s equilibrium market exchange rate, YTL/US$?
Explain.
(b) (5 points) How would a higher rate of inflation in Turkey be expected to alter the
nominal interest rates in Turkey? Explain.
(c) (5 points) How does a higher rate of inflation affect the real value of the interest
expenses each year that are deducted from taxable income?
(d) (5 points) How does an expected decrease in the real exchange rate over time
affect a country’s real rate of interest?

QUESTION
Suppose you need to find the opportunity cost of some existing assets that are to be used
in an expansion of a facility. How would you estimate their liquidation values? How
would you estimate their replacement costs?

a) (10 points). Suppose you plan to use some assets from an existing facility
that was purchased five years ago in a project that involves the expansion
of this existing facility. How are the net current replacement cost of these
assets affected by (i) the rate of inflation over the past 5 years (ii) the rate
of economic depreciation of the assets?
QUESTION
(a) (7 points). Explain the rule that one should follow in determining the correct
time to start a project if the benefits of the project are continuously rising with
calendar time and the present value of the initial investment costs are reduced
if the project is postponed. Is this rule for determining when to start a project
still correct if the profile of potential benefits first rises and then falls with
calendar time?
Note: The present value of the initial investment costs are calculated as of the
period the project’s investment is completed.

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 (b) (8 points). “When deciding on the right scale to build a project, should one
keep increasing the project’s scale until the internal rate of return and the net
present value of the last incremental additional to scale are maximized? Please
explain your answer.
QUESTION
a) Why do we need to do a risk analysis when undertaking an evaluation of
investment project? What is the one strength and one weakness in the use of a
sensitivity analysis to evaluate the riskiness of the project?

b) What are the main differences between a Sensitivity Analysis and a Monte
Carlo Risk Analysis? How do you use the results of a sensitivity analysis to
carry out a Monte Carlo Risk Analysis?
c) In a risk analysis, what is the purpose of organizing a frequency distribution
table? Where do we use it? Under what situation will you have the data to
construct a frequency distribution table?
QUESTION
(a) (5 points) How does a cost-effectiveness analysis differ from a cost-benefit
analysis?
(b) (5 points) What is the function of the discount rate in a cost-effectiveness
analysis? What does the discounted value of benefits mean?
(c) (5 points) How does the cost-effectiveness measure of the saving of a year of life
differ from the Disability Adjusted Life Years (DALY) and Quality Adjusted Life
Years (QALY)?

QUESTION
(a) (5 points). Explain how a cost effectiveness analysis is used in the selection
of investments in the public sector.
(b) (5 points). What are some of the weaknesses of a cost-effective analysis?
(c) (5 points). How does a cost-effectiveness analysis differ from a cost- benefit
analysis?
QUESTION
(a) (8 points). Explain what is meant by project monitoring? Why do you
need project monitoring? What are the some of the tools used in carrying
out the project monitoring functions?
(b) (7 points). Please give at least three reasons why an organization would
want to carry out a post evaluation of a project? Please be explicit in your
answer with respect to the types of benefits that post evaluation can yield
for an organization.

Briefly explain why the following statements are true, false or uncertain. (30 points,
5 points each)

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1. Suppose during first one or two years of a project life, there is a decision to have
larger quantities of inventories of raw materials and finishing products. This will
cause the net cash flow of the project to fall during these years. (true)

2. When constructing the incremental cash flow profile of a project you need to
compare the situation with the project with present situation before the project is
undertaken. (not true) with and without

3. Suppose you are evaluating a project such as a road where the annual benefits are
increasing with calendar time. The present value (PV) of investment costs of build
the road is the same amount no matter when the road is built. In this case the net
present value of the project will be increased if the date that the road is completed
and ready for service is postponed. ( depends on exchange rate, inflation)

4. Increases in the value of any land used by a project should always be included in
the benefits of a project.( depends on source of increase) false

5. An Escrow Fund usually restricts the payment of dividends in order to cumulate

cash for the purpose of servicing the debt of a project. (true)

6. Suppose the debt service capacity ratio, DSCR, is satisfactory for entire period
that the debt is outstanding. Then it must be the case that each of the annual debt
service coverage ratios, ADSCR, during this period must also be satisfactory.
(false) DSCR=LLCR

7. An incremental cost effectiveness ratio measures the total effectiveness of a

program as compared to doing nothing.. ( NOT true)

8. Project monitoring is an activity you undertake after the project is completed. (not
true)

9. To have a cost effective project monitoring system one must be monitoring as

many project variables as possible. (false) high costs

10. A post-evaluation of a project is undertaken only to determine the final rate of

return of the project. (false)

11. The risk associated with the outcomes of a project tend to be reduced the further
one forecasts the outcomes into the future. ( true) try to foresee the risk

12. In the fight against the spread of HIV, all the cost effective health interventions
cost more than US$200 per Daly saved. (false)

13. The cost effectiveness ratio of a health interventions will rise as more of the
burden of an intervention is passed on to other family measures and not included
in the total costs of the intervention.( true??? )

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14. As a project is delayed it is possible to have the net present value of a project
falling while the internal rate of return may be rising or falling.( true)

15. A Daly and a Qaly measure the same thing. ( false)

16. If the number of children that use a classroom is increased the effectiveness of an
education project to increase school classrooms will be increased. ??( true) CE=pv
of costs/ pv of effectiveness, one policy is 6, another 9. so we choose 6.

17. Repairing of classrooms is never as good as building a new classroom in terms of

the cost effectiveness of achieving education outcomes from building more school
buildings. ?? (maybe we have classes which we don’t use, we can repair them)

18. If the rate of turn is higher for primary education than for secondary education it
should not affect the measurement of effectiveness of education outcomes from
building more school classrooms. (

19. In a cost effectiveness analysis reducing the discount rate always lowers the ratio
of the cost per unit of effectiveness. ( uncertain)

20. In reporting on the outcomes of a Monte Carlo Risk Analysis a cumulative

probability distribution of the possible NPVs of a project will give different
information than will a probability distribution of the project’s NPVs. (uncertain)