Online Access Free P2 Practice Test

Three years ago the large number of faulty products being returned by its customers resulted in a company adopting total quality management (TQM). The company has increased expenditure on staff training and product inspections. This has resulted in a reduction in the number of faulty products returned.
Which of the following statements is correct?

• A.Spending more on non-conformance costs has resulted in a reduction in conformance costs.
• B.Spending more on conformance costs has resulted in a reduction in external failure costs.
• C.Spending more on conformance costs has resulted in a reduction in internal failure costs.
• D.Spending more on prevention costs has resulted in a reduction in appraisal costs.

Which of the following statements is correct?

• A.Uncertainty cannot be quantified and probabilities can be assigned reliably to the possible outcomes.
• B.Uncertainty can be quantified and probabilities can be assigned reliably to the possible outcomes.
• C.Risk can be quantified and probabilities can be assigned reliably to the possible outcomes.
• D.Risk cannot be quantified and probabilities cannot be assigned reliably to the possible outcomes.

A company is considering two mutually exclusive projects, an analysis of which is given below:

The company's cost of capital is 12%.
Assuming an objective of maximising shareholders' wealth, which project would be recommmended?

• A.Project A because it has the higher accounting rate of return.
• B.Project B because it has the higher net present value.
• C.Project B because it has the shorter payback period.
• D.Project A because it has the higher internal rate of return.

A project is viable because it has a positive net present value (NPV).
Details of four of the input variables, together with the sensitivity of the viability of the project to a change in each one in isolation, are given below.

Which of the following statements is correct?

• A.A 1% change in the initial investment will result in a change of 3% in the NPV.
• B.The resale value at the end of the project is the most sensitive of the four variables.
• C.If the rate of taxation on profits increases to 40% then the project will no longer be viable.
• D.If the incremental annual cash contributions reduce by more than 8% then the project will no longer be viable.

In an inflationary environment which is the correct way of calculating net present value (NPV)?

• A.Forecasting the cash flows excluding the effect of inflation and then using a nominal discount rate.
• B.Using nominal cash flows and a nominal discount rate.
• C.Forecasting the cash flows including the effect of inflation and then using a real discount rate.
• D.Using real cash flows and a nominal discount rate.