Online Access Free P2 Practice Test

Which of the following statements regarding multinational transfer pricing is INCORRECT?

• A.Companies have incentives to set transfer price to increase revenues in low-tax countries.
• B.If transfer prices are inflated, this will increase profits of buying division.
• C.Transfer prices affect tax liabilities and royalties because of different laws in countries.
• D.Companies have incentives to set transfer price to increase costs in high-tax countries.

The directors of a company wish to evaluate two mutually exclusive capital investment projects. Both projects have conventional cash flows: an initial outflow followed by a series of annual cash inflows.
The directors are aware of the following three investment appraisal methods: internal rate of return (IRR), net present value (NPV) and accounting rate of return (ARR).
The directors have asked for your advice about which method should be used to evaluate these two projects.
Which of the following is valid advice to give to the directors?

• A.IRR should be used because both NPV and ARR could lead to an incorrect investment decision.
• B.IRR should NOT be used because it could result in multiple IRRs.
• C.ARR should be used because it is based on profit whereas both IRR and NPV are based on cash flows.
• D.NPV should be used because it focuses on wealth creation whereas IRR and ARR are both relative measures.

Under the absorption costing system, which simply allocates our entire amount of production overheads based on machine hours, we have found that out of our 4 products, 2 are profitable, 1 breaks even and
1 is
making a loss.
Model D the most recent addition to the range is making a large loss after the price of a major component rose dramatically. Model A is only just breaking now too as costs have risen. The only two products making profit are Models B and C. These two require the least about of machine hours so this makes sense.
However, the management have a few reservations. They cannot understand how B is so profitable. It requires several more stages of production than the other models and a whole day longer to be customised by an expert.
Select the correct answer from the list below that can help to explain this situation.

• A.ABC would show that only a small amount of our overheads are based on machine hours.
• B.ABC could have shown that some products are selling poorly and should be discontinued.
• C.ABC would show that if overheads are shared equally that model B would be less profitable.

The following forecast data relate to the first three years of a five year project.
The project will require an initial investment of $30,000 in non-current assets.
All revenue will be received in the year it is earned and all operating costs will be paid in the year they are incurred. Tax will be paid in the following year.
Tax depreciation will be 25% per annum of the reducing balance.
The taxation rate will be 30% of taxable profits.

What is the forecast after tax cash flow for year 3 (to the nearest $10)?

• A.$38,500
• B.$39,750
• C.$45,890
• D.$46,000

There is a 60% probability of a project yielding a positive net present value (NPV) of $280,000 and a 30% probability of it yielding a positive NPV of $140,000.
The only other possible outcome is that the project will yield a negative NPV of $160,000.
What is the expected value of the project's NPV?

• A.$210,000
• B.$280,000
• C.$194,000
• D.$260,000