2015 April

Discussion in 'CB1' started by Pxliang, Aug 8, 2019.

  1. Pxliang

    Pxliang Active Member

    2015 April no4
    An investor is considering the purchase of a 2% Treasury Bill that is trading at a discount. Which of the following statements is correct?
    Can I know how should I solve this question? Can I know whats the meaning of Treasury Bill?

    2015 April no 5
    Is there a formula for payback period for this question?

    2015 April no 6
    WHy the answer is B why cant I choose D ?

    2015 April no 10
    Can I know why book value and retained earnings are ignored in this question?

    2015 April no 11
    Answer stated here :"Taxpayers do not need to pay tax until they are raising cash from the disposal of the asset. " Can I know what is the underlying meaning of raising cash from disposal of asset ?

    2015 April no 13
    the lessor here is the company who lease asset from the software company right ?WHy it said that the "lessor runs very little risk in the event that the software company defaults on the rent payments.", is it the lessor rent the asset to the software company ?

    2015 April no 16
    why the answer said "This project has a positive NPV when the required rate of return is greater than 2% or less than 9%. "and why " If discount rates are very small then the cost incurred at the conclusion of the project will have much greater significance and that could be enough to make the net present value negative. "?
     
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  2. Lynn Birchall

    Lynn Birchall ActEd Tutor Staff Member

    Hi

    Q4 : Treasury bills are short-dated securities used by governments. They are issued at a discount and redeemed at par. In this case, it seems the initial discount offered a 2% return and the 'trading at a discount' suggests the price has fallen since it was first issued.

    Q5 : Remember the definition of payback period, ie time for accumulated cashflow to become neutral. So, we need to determine how long profits (180k pa) need o be received to payback the initial 700k cost.

    Q6 : B is closer to the definition of the consistency concept in the Core Reading :)

    Q10 : I don't think they are ignored? Non-controlling interest is a % of the book value and retained earnings?

    Q11 : It means actually having cash (rather than the asset). For example, if I sold a property, I'd receive cash and could use that cash to pay any tax associated with the property making a capital gain. Otherwise, if the tax system charged me tax just because the value of the property had gone up, I might not have any cash I could use to pay the tax bill (I can't pay a tax bill with a property).

    Q13 : The lessor here is the company to which the software company has sold its office. The software company is then paying rent to the lessor.

    Q16 : Because the IRR has two solutions, a graoh of the NPV curve (NPV determined at different discount rates) would cross the x axis in two places (and be positive for values inbetween). If discount rates are very small, then discounting has a smaller effect. So a negative cashflow in the future has a relatively bigger impact on NPV if the discount rate is small.

    Hope these help
    Lynn
     

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