1 .		Colours plc is considering three investment proposals, the details of which are as follows:   Projected cash flows   Black Orange Green Blue   £m £m £m £m Initial outlay 20 23 27 18 Net present value 8 9 10 5 If the business has limited finance available with which to invest, how should the projects be ranked ( assuming that each project is divisible)?   Ranking   Black Orange Green Blue   £m £m £m £m A 1 2 3 4 B 2 1 4 3 C 1 3 2 4 D 2 3 1 4           [Hint]
2 .		Assume the same information as in Question 1 above.. In which project should the company invest if it has £30.0m to spend and the projects are not divisible? [Hint]
3 .		The expected value-standard deviation rule states that where there are two competing projects, X and Y, Project X should be chosen when either: (1) the expected return of Project X is equal to or greater than, that of Project Y and the standard deviation of Project X is higher than that of Project Y; (2) the expected return of Project X is lower than that of Project Y and the standard deviation of Project X is equal to, or lower than, that of Project Y. Are the above statements true or false?   Statement   (1) (2) A True True B True False C False True D False False [Hint]
4 .		Roscoff plc is considering a new project. The possible NPV's for the project and their associated probabilities are as follows: New project NPV Probability £m   15 0.2 30 0.5 40 0.3 What is the standard deviation of the project? [Hint]
5 .		A risk-averse investor: (1) is not prepared to take on risky investments (2) will receive diminishing satisfaction from each increment in wealth Are the above statements true or false?   Statement   (1) (2) A True True B True False C False True D False False [Hint]
6 .		Calais plc has developed a new type of battery. To date research and development costs associated with the battery have been £100,000. In order to produce the new battery, equipment costing £480,000 will be required immediately. The equipment will have no residual value at the end of the project at the end of the product life of the battery, which is estimated at two years. Each battery is expected be sold for £5.50 and to cost £2.50 to produce. Sales are expected to be 150,000 units per year over a two-year period. The company has a cost of capital of 10 per cent. (Discount factor to 2 decimal places) What is the decrease in annual net operating cash flows that would cause the project to have a zero NPV? [Hint]
7 .		Assume the same information that is contained in Question 5 above except that the selling price of the battery is £5.00. What would be the increase in the cost of the equipment that would cause the project to have a zero NPV? (Discount factor to 2 decimal places.) [Hint]
8 .		A risk-seeking investor will have a utility function that is: [Hint]
9 .		Where a normal distribution of outcomes occurs, what is the approximate percentage of outcomes that will fall within two standard deviations of the mean or expected value? [Hint]
10 .		A study of UK manufacturing companies by Drury and others found that the most popular method of dealing with risk in practice was: [Hint]
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