Question No: 1

Mr. A, as a financial consultant, has prepared a feasibility report of a project for XYZ Company that the company is planning to undertake. He has suggested that the project is feasible. The consultancy fee paid to Mr. A will be considered as:
a)Sunk cost
b)Opportunity cost
c)Both sunk cost and opportunity cost
d)Neither sunk cost nor opportunity cost
Question No:2
One would be indifferent between taking and not taking the investment when:
a)NPV is greater than Zero
b)NPV is equal to Zero
c)NPV is less than Zero
d)All of the given options

1. B

2. D

Question No: 1

To determine the answer to this question, we need to understand the concept of sunk cost and opportunity cost.

A sunk cost refers to a cost that has already been incurred and cannot be recovered, regardless of whether the project is undertaken or not. In this scenario, the consultancy fee paid to Mr. A has already been paid and cannot be refunded. Therefore, it can be considered as a sunk cost.

On the other hand, an opportunity cost refers to the value of the best alternative forgone when making a decision. In this case, the opportunity cost would be the value of the next best alternative use of the funds used to pay Mr. A's consultancy fee.

Answer: c) Both sunk cost and opportunity cost

Question No: 2
To determine the answer to this question, we need to understand the concept of Net Present Value (NPV).

NPV is a financial metric that is used to determine the profitability of an investment by calculating the difference between the present value of cash inflows and outflows over a specific time period. If the NPV is positive, it indicates that the investment is expected to generate a positive return. If the NPV is negative, it indicates that the investment is expected to result in a negative return. If the NPV is equal to zero, it means that the investment will neither generate a positive nor a negative return.

Therefore, if one is indifferent between taking and not taking the investment, it means that the NPV is equal to zero.

Answer: b) NPV is equal to Zero

To calculate NPV, you need to:

1. Determine the expected cash flows for each period.
2. Determine the appropriate discount rate.
3. Calculate the present value of each cash flow by dividing it by (1 + discount rate) raised to the power of the period number.
4. Sum up all the present values of cash flows.
5. Subtract the initial investment from the sum of present values to calculate the NPV.

Please note that the specific values, cash flows, and discount rates need to be provided in order to calculate the NPV accurately.