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Time value of Money, capital budgeting, audit report

Question 1
Indicate whether the following are true or false and briefly motivate your answer.
a) Time value of money is equal to inflation plus interest
b) Fixed cost remains the same even if variable cost and production increase.
c) High risk financial instruments are likely to generate high returns
d) Annualised compounding does not takes into account money invested in the first year
e) Investment decisions are when the decisions to lease or buy assets can be made based on net present values.
f) Repayment of loans is a cash inflow
h) Discounts rates are applied to determine future value.

Question 2
Explain the difference between equity and bond investment, which of the two is more risky?

Question 3
You are appointed as financial adviser for Tutale Investment(Pty) Limited,the company intend budgeting for long term capital project, but not clear on the impact of time value of money.You are thus required to advise management on impact of time value of money on capital budgeting.

Question 4
Define the term valuation in the context of financial assets.

Question 5
PWC (The external Auditors) of Tutule Investment (PTY) Limited for 2013 qualified
the financial statement for the company.Explain in detail what does this mean for the company's financial control.

Solution Preview

Question 1
Indicate whether the following are true or false and briefly motivate your answer.

a) Time value of money is equal to inflation plus interest

F: Time value of money is the difference between what today's amount would grow to at a particular rate. That rate could include inflation or not.

b) Fixed cost remains the same even if variable cost and production increase.

F: Fixed costs stay the same within the relevant range. Once the relevant range is exceeded, either in years or in activity, they change. For instance, the cost of the facility is fixed unless business doubles and you need a second facility. Now fixed costs just changed.

c) High risk financial instruments are likely to generate high returns

T: High risk securities have to carry high possible returns in order to attract buyers. They are also likely to generate high losses.

d) Annualized compounding does not takes into account money invested in the first year

F: Annualized compounded considers all amounts.

e) Investment decisions are when the decisions to lease or buy assets can be made based on net present values.

F: Investment decisions include a broad range of decisions, including when to repair vs. replace, when to repair vs. renovate, how to manage idle cash, when an opportunity is attractive enough to borrow and so forth. The example given is only one possible decision and one possible criteria.

f) Repayment of loans is a cash ...

Solution Summary

Your discussion is 696 words and explains how time value of money works, how capital budgeting uses time value of money and how the qualified audit report reflects on management.

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