I85PREP
⌘ K
KASNEB CA26 study materials
KASNEB CA26 study resources

KASNEB CA26 practice questions

One question at a time. Build your KASNEB CA26 understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Accountancy

A business has total assets of Ksh 850,000 and total liabilities of Ksh 320,000. What is the amount of owner's equity?

  1. Ksh 850,000
  2. Ksh 1,170,000
  3. Ksh 530,000 Correct answer.
  4. Ksh 320,000

Explanation

The accounting equation states that assets equal equity plus liabilities, so equity is derived as assets less liabilities. Here Ksh 850,000 less Ksh 320,000 gives equity of Ksh 530,000.

Question 2Accountancy

What is the main purpose of preparing a trial balance?

  1. To disclose the financial position at the period end
  2. To test arithmetical accuracy of the ledger Correct answer.
  3. To summarise the cash book for the period
  4. To confirm that no errors or fraud have occurred

Explanation

A trial balance lists ledger balances by debit and credit and confirms that total debits equal total credits. It therefore tests arithmetical accuracy only, and it cannot detect errors of principle, omission or compensating errors.

Question 3Accountancy

Which of the following items is capital expenditure?

  1. Paying annual insurance on the building
  2. Installing a new lift in the building Correct answer.
  3. Repainting the office building
  4. Replacing a broken window pane

Explanation

Capital expenditure acquires or improves a non-current asset and provides benefit beyond the current period. Installing a lift adds to the earning capacity of the building and is therefore capitalised, whereas maintenance-type costs are charged to profit or loss.

Question 4Accountancy

A business settles a supplier's account early and receives a cash discount. What is the correct double entry?

  1. Debit payables, credit discount received Correct answer.
  2. Debit cash, credit purchases
  3. Debit purchases, credit cash
  4. Debit discount received, credit payables

Explanation

The supplier's account must be reduced by the discount, so payables are debited. The benefit received is income, so discount received is credited to the income statement.

Question 5Accountancy

Preparing financial statements on the going concern basis assumes that the entity will:

  1. continue in operation for the foreseeable future Correct answer.
  2. realise its assets at their market values
  3. cease trading within twelve months of the year end
  4. repay all its borrowings within the next year

Explanation

The going concern assumption means the entity is expected to continue in operation for the foreseeable future without liquidating or curtailing operations. This justifies carrying assets at cost or revalued amounts rather than at break-up values.

Question 6Accountancy

Fixed costs are Ksh 240,000 and the contribution per unit is Ksh 60. What is the break-even point in units?

  1. 2,400 units
  2. 6,000 units
  3. 4,000 units Correct answer.
  4. 14,400 units

Explanation

Break-even units equal fixed costs divided by contribution per unit. Dividing Ksh 240,000 by Ksh 60 gives 4,000 units, the level at which total contribution exactly covers fixed costs.

Question 7Accountancy

Current assets are Ksh 400,000 including inventory of Ksh 100,000, and current liabilities are Ksh 200,000. What is the quick ratio?

  1. 1.5 Correct answer.
  2. 1.0
  3. 0.5
  4. 2.0

Explanation

The quick ratio excludes inventory from current assets and divides the remainder by current liabilities. Ksh 300,000 divided by Ksh 200,000 gives 1.5.

Question 8Accountancy

When preparing a bank reconciliation, cheques issued by the business but not yet presented at the bank are:

  1. added to the cash book balance
  2. added to the balance per bank statement
  3. deducted from the cash book balance
  4. deducted from the balance per bank statement Correct answer.

Explanation

The bank statement still shows the money because the cheque has not been cleared, so the bank statement balance is higher than it should be. Unpresented cheques are therefore deducted from the bank statement balance to arrive at the adjusted figure.

Question 9Accountancy

Electricity bills paid during the year totalled Ksh 180,000. At the year end Ksh 15,000 was still owing, and a prepayment of Ksh 10,000 brought forward from the previous year related to the current year. What is the electricity expense for the year?

  1. Ksh 180,000
  2. Ksh 185,000 Correct answer.
  3. Ksh 205,000
  4. Ksh 175,000

Explanation

Under the accruals basis, expense equals payments plus closing accruals less opening prepayments. Ksh 180,000 plus Ksh 15,000 less Ksh 10,000 gives Ksh 185,000.

Question 10Accountancy

A machine costing Ksh 1,200,000 with an estimated residual value of Ksh 200,000 and a useful life of five years was purchased on 1 April. The entity's year end is 31 December. Using straight-line depreciation, what is the depreciation charge for the first year?

  1. Ksh 150,000 Correct answer.
  2. Ksh 200,000
  3. Ksh 240,000
  4. Ksh 180,000

Explanation

Annual depreciation is the depreciable amount of Ksh 1,000,000 spread over five years, giving Ksh 200,000 a year. Only nine months of use arise in the first year, so the charge is Ksh 200,000 multiplied by 9/12, which is Ksh 150,000.

Question 11Accountancy

Inventory has a cost of Ksh 50,000, an expected selling price of Ksh 55,000 and estimated selling costs of Ksh 8,000. At what amount should the inventory be measured?

  1. Ksh 42,000
  2. Ksh 47,000 Correct answer.
  3. Ksh 50,000
  4. Ksh 55,000

Explanation

IAS 2 requires inventory to be measured at the lower of cost and net realisable value. Net realisable value is Ksh 55,000 less Ksh 8,000, that is Ksh 47,000, which is below cost and is therefore used.

Question 12Accountancy

Which condition must be satisfied before expenditure on an internally generated intangible can be capitalised as development cost?

  1. Technical feasibility of completing the asset Correct answer.
  2. The expenditure exceeds a set threshold
  3. The project has already started generating revenue
  4. Management has approved a budget for the project

Explanation

IAS 38 requires all the development recognition criteria to be met, including technical feasibility, intention and ability to complete, probable future economic benefits, available resources and reliable measurement. Revenue generation is not one of the criteria, and a budget alone is insufficient.

Question 13Accountancy

A provision should be recognised when:

  1. a future obligation is expected to arise from a planned purchase
  2. the board has announced a restructuring to employees
  3. there is a present obligation that can be measured reliably Correct answer.
  4. the entity intends to make a payment in future periods

Explanation

IAS 37 requires a present obligation arising from a past event, a probable outflow of resources and a reliable estimate before a provision is recognised. An intention or a future obligation does not meet the past event requirement.

Question 14Accountancy

Which of the following is an adjusting event after the reporting period?

  1. The announcement of a major business combination after the year end
  2. A share issue completed after the year end
  3. A fire that destroyed the warehouse after the year end
  4. Insolvency of a customer with an outstanding year-end balance Correct answer.

Explanation

IAS 10 requires adjustment where the event provides evidence of conditions that existed at the reporting date. A customer's insolvency confirms the receivable was impaired at year end, so the financial statements are adjusted.

Question 15Accountancy

A contract has two performance obligations with stand-alone selling prices of Ksh 60,000 and Ksh 40,000 and a total transaction price of Ksh 90,000. How much revenue is allocated to the first obligation?

  1. Ksh 36,000
  2. Ksh 45,000
  3. Ksh 60,000
  4. Ksh 54,000 Correct answer.

Explanation

Under IFRS 15 the transaction price is allocated in proportion to stand-alone selling prices. The first obligation represents 60 percent of the Ksh 100,000 total, so it receives 60 percent of Ksh 90,000, which is Ksh 54,000.

Question 16Accountancy

Under IFRS 16, a lessee initially measures the lease liability at:

  1. the carrying amount of the asset in the lessor's books
  2. the total undiscounted lease payments over the lease term
  3. the present value of the lease payments Correct answer.
  4. the fair value of the underlying asset at inception

Explanation

IFRS 16 requires the lease liability to be measured at the present value of the lease payments not paid at the commencement date, discounted using the interest rate implicit in the lease or the lessee's incremental borrowing rate. A right-of-use asset is then recognised at a corresponding amount adjusted for initial direct costs and lease incentives.

Question 17Accountancy

Under IAS 7, interest paid by a non-financial entity may be classified as:

  1. either operating or financing cash flow Correct answer.
  2. operating cash flow only, as required by the standard
  3. investing cash flow, together with interest received
  4. financing cash flow only, as required by the standard

Explanation

IAS 7 permits interest paid to be presented within operating activities or within financing activities, provided the choice is applied consistently. Interest received, by contrast, may be classified as operating or investing.

Question 18Accountancy

Trade receivables are Ksh 800,000 and an allowance for receivables of 5 percent is required. What is the net carrying amount of receivables?

  1. Ksh 840,000
  2. Ksh 40,000
  3. Ksh 800,000
  4. Ksh 760,000 Correct answer.

Explanation

The allowance is 5 percent of Ksh 800,000, which is Ksh 40,000, and it is deducted from the gross receivables. The net figure is therefore Ksh 760,000, with the allowance charged to profit or loss.

Question 19Accountancy

Budgeted overheads are Ksh 500,000 and budgeted machine hours are 25,000. Actual machine hours worked were 26,000. What amount of overhead is absorbed?

  1. Ksh 540,000
  2. Ksh 520,000 Correct answer.
  3. Ksh 500,000
  4. Ksh 480,000

Explanation

The predetermined absorption rate is Ksh 500,000 divided by 25,000 hours, giving Ksh 20 per machine hour. Absorbed overhead is the actual hours multiplied by this rate, that is 26,000 hours at Ksh 20, which equals Ksh 520,000.

Question 20Accountancy

Which error would cause the trial balance totals to disagree?

  1. One side of a transaction was not posted Correct answer.
  2. An expense was treated as a non-current asset
  3. A purchase was recorded twice in both accounts
  4. A sale was recorded in the wrong customer's account

Explanation

A trial balance fails to agree only when the debits and credits of the double entry are unequal. Posting one side of a transaction without the other creates such an imbalance and is corrected through a suspense account.

Question 21Accountancy

Opening inventory was 500 units and closing inventory was 800 units. The fixed overhead absorption rate is Ksh 12 per unit. If absorption costing profit is Ksh 96,000, what is the marginal costing profit?

  1. Ksh 103,600
  2. Ksh 99,600
  3. Ksh 96,000
  4. Ksh 92,400 Correct answer.

Explanation

When inventory rises, absorption costing carries fixed overhead forward in inventory, so its profit exceeds marginal costing profit by the increase in units multiplied by the fixed overhead rate. The increase of 300 units at Ksh 12 gives Ksh 3,600, so marginal profit is Ksh 96,000 less Ksh 3,600, which is Ksh 92,400.

Question 22Accountancy

A building carried at Ksh 500,000 is revalued to Ksh 650,000 and has a remaining useful life of 10 years with no residual value. What amount is transferred from revaluation surplus to retained earnings each year?

  1. Ksh 15,000 Correct answer.
  2. Ksh 65,000
  3. Ksh 50,000
  4. Ksh 150,000

Explanation

Depreciation on the revalued amount is Ksh 65,000 and depreciation on original cost would have been Ksh 50,000. The excess of Ksh 15,000 is the amount realised each year and is transferred from revaluation surplus to retained earnings.

Question 23Accountancy

A and B share profits in the ratio 3:2. C is admitted for a one-fifth share, which is taken from A and B in their profit-sharing ratio. What is the new profit-sharing ratio of A, B and C?

  1. 12:8:3
  2. 3:2:1
  3. 9:6:5
  4. 12:8:5 Correct answer.

Explanation

The sacrifice is shared 3:2, so A gives up 3/25 and B gives up 2/25 of the total. A retains 15/25 less 3/25, which is 12/25, B retains 10/25 less 2/25, which is 8/25, and C holds 5/25, giving 12:8:5.

Question 24Accountancy

A company has 400,000 ordinary shares of Ksh 10 each and a share premium balance of Ksh 1,200,000. It makes a one-for-four bonus issue. What is the share premium balance immediately after the issue?

  1. Ksh 200,000 Correct answer.
  2. Nil
  3. Ksh 1,000,000
  4. Ksh 1,200,000

Explanation

A one-for-four bonus issue creates 100,000 new shares, which at Ksh 10 each require Ksh 1,000,000 from reserves. The share premium of Ksh 1,200,000 is reduced by that amount, leaving Ksh 200,000.

Question 25Accountancy

The standard for a product is 3 kg of material at Ksh 20 per kg. Actual production of 1,000 units used 3,200 kg costing Ksh 67,200. What is the material price variance?

  1. Ksh 4,000 adverse
  2. Ksh 4,000 favourable
  3. Ksh 3,200 adverse Correct answer.
  4. Ksh 3,200 favourable

Explanation

The actual price is Ksh 67,200 divided by 3,200 kg, which is Ksh 21 per kg, against a standard of Ksh 20. The variance is the price difference of Ksh 1 applied to 3,200 kg purchased and used, giving Ksh 3,200 adverse since the actual price is higher.

Question 26Accountancy

A business operates a petty cash imprest of Ksh 20,000. At the end of the month, paid vouchers total Ksh 14,500 and the cash remaining in the box is Ksh 5,500. How much must be reimbursed to restore the imprest?

  1. Ksh 5,500
  2. Ksh 20,000
  3. Ksh 14,500 Correct answer.
  4. Ksh 25,500

Explanation

Under the imprest system the float is restored to its original amount each time it is reimbursed, so the reimbursement equals the total of the paid vouchers, which is the amount actually spent. Here the vouchers total Ksh 14,500, leaving the box with Ksh 5,500 and the float at its full Ksh 20,000 once the cheque is cashed.

Question 27Accountancy

Opening inventory was 100 units valued at Ksh 10 each. A purchase of 200 units was made at Ksh 12 each and 150 units were sold. Using the FIFO method, what is the value of closing inventory?

  1. Ksh 1,600
  2. Ksh 1,700 Correct answer.
  3. Ksh 1,800
  4. Ksh 1,500

Explanation

FIFO assumes the oldest units are sold first, so the 150 units sold are taken from the opening inventory (100 units at Ksh 10) and 50 of the newer units at Ksh 12. Closing inventory is therefore 50 units at Ksh 10 plus 100 units at Ksh 12, giving Ksh 1,700.

Question 28Accountancy

Which qualitative characteristic of useful financial information requires the information to be free from bias in the selection or presentation of financial information?

  1. Neutrality Correct answer.
  2. Comparability
  3. Verifiability
  4. Timeliness

Explanation

Neutrality means that the depiction of financial information is without bias, so the information is not slanted to produce a predetermined outcome. It supports faithful representation, since biased information cannot be complete, neutral and free from error.

Question 29Accountancy

A business reports sales of Ksh 800,000 and cost of sales of Ksh 600,000. What is the gross profit margin?

  1. 25% Correct answer.
  2. 75%
  3. 20%
  4. 33.3%

Explanation

The gross profit margin expresses gross profit as a percentage of revenue. Gross profit is Ksh 800,000 less Ksh 600,000, equal to Ksh 200,000, and Ksh 200,000 divided by Ksh 800,000 gives 25%.

Question 30Accountancy

Plant has a carrying amount of Ksh 500,000. Its fair value less costs of disposal is Ksh 430,000 and its value in use is Ksh 450,000. What is the impairment loss to be recognised?

  1. Ksh 70,000
  2. Nil
  3. Ksh 50,000 Correct answer.
  4. Ksh 20,000

Explanation

The recoverable amount is the higher of fair value less costs of disposal and value in use, which is Ksh 450,000. An impairment loss arises only where the carrying amount exceeds the recoverable amount, so the loss is Ksh 500,000 less Ksh 450,000, equal to Ksh 50,000.

Question 31Accountancy

A possible obligation arises from a past event and its existence will be confirmed only by the occurrence or non-occurrence of uncertain future events not wholly within the control of the entity. How should this item be treated?

  1. Neither recognised nor disclosed in the financial statements
  2. Recognised as a provision measured at the best estimate of the outflow
  3. Recognised as a liability only when the amount can be measured reliably
  4. Disclosed as a contingent liability unless the possibility of an outflow is remote Correct answer.

Explanation

A possible obligation that depends on uncertain future events is a contingent liability, not a present obligation. It is not recognised because recognition requires a present obligation, but it is disclosed unless the possibility of an outflow of economic benefits is remote.

Question 32Accountancy

Total costs were Ksh 85,000 at an activity level of 10,000 units and Ksh 115,000 at 15,000 units. Using the high-low method, what is the variable cost per unit?

  1. Ksh 8.50
  2. Ksh 25.00
  3. Ksh 6.00 Correct answer.
  4. Ksh 4.00

Explanation

The high-low method divides the change in total cost by the change in activity between the highest and lowest levels. The change in cost is Ksh 30,000 and the change in activity is 5,000 units, giving a variable cost of Ksh 6 per unit.

Question 33Accountancy

Annual demand for a component is 10,000 units, the cost of placing one order is Ksh 50 and the holding cost is Ksh 4 per unit per annum. Using the economic order quantity formula, what is the optimal order size?

  1. 1,000 units
  2. 500 units Correct answer.
  3. 2,000 units
  4. 250 units

Explanation

The economic order quantity is the square root of twice annual demand multiplied by ordering cost, divided by holding cost per unit. That is the square root of (2 x 10,000 x 50)/4, which equals the square root of 250,000, or 500 units.

Question 34Accountancy

In a process costing period with no opening work in progress, 900 units were completed and transferred out while 300 units remained in closing work in progress that was 60% complete for conversion costs. What are the equivalent units for conversion costs?

  1. 1,200 units
  2. 1,080 units Correct answer.
  3. 900 units
  4. 1,020 units

Explanation

Equivalent units equal units completed plus the closing work in progress expressed in terms of completed units. The closing work in progress contributes 300 x 60%, which is 180 equivalent units, so the total is 900 + 180 = 1,080 units.

Question 35Accountancy

Sales for the year were Ksh 500,000. Trade receivables were Ksh 60,000 at the start of the year and Ksh 80,000 at the end of the year. What amount of cash was received from customers during the year?

  1. Ksh 460,000
  2. Ksh 480,000 Correct answer.
  3. Ksh 520,000
  4. Ksh 500,000

Explanation

Cash received equals sales adjusted for the movement in receivables: add the opening balance and deduct the closing balance. That gives Ksh 500,000 + Ksh 60,000 - Ksh 80,000 = Ksh 480,000, the difference being the increase in receivables not yet settled in cash.

Question 36Accountancy

Under IAS 20, how is a government grant relating to an asset recognised in profit or loss?

  1. When the grant becomes repayable
  2. Over the asset's life, with depreciation Correct answer.
  3. Only when the related asset is disposed of
  4. In full on the date the grant is received

Explanation

A grant relating to an asset is recognised in profit or loss over the periods in which the entity recognises the related costs of the asset, that is, in line with depreciation. This matches the benefit of the grant with the periods that bear the cost of the asset.

Question 37Accountancy

Profit attributable to ordinary shareholders is Ksh 2,400,000 and 800,000 ordinary shares were in issue throughout the year. What is basic earnings per share?

  1. Ksh 0.33
  2. Ksh 4.80
  3. Ksh 2.40
  4. Ksh 3.00 Correct answer.

Explanation

Basic earnings per share is profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the period. Ksh 2,400,000 divided by 800,000 shares gives Ksh 3.00 per share.

Question 38Accountancy

An entity had 1,000,000 ordinary shares in issue and reported earnings per share of Ksh 4.00 for the previous year. In the current year it made a rights issue of one new share for every four held at Ksh 15, when the market price was Ksh 20. What is the restated comparative earnings per share for the previous year?

  1. Ksh 3.20
  2. Ksh 4.00
  3. Ksh 3.80 Correct answer.
  4. Ksh 4.21

Explanation

Theoretical ex-rights price is (1,000,000 x Ksh 20 + 250,000 x Ksh 15) / 1,250,000 = Ksh 19, giving a bonus factor of 20/19 = 1.0526. The prior year figure is restated by dividing by the bonus factor, so Ksh 4.00 / 1.0526 = Ksh 3.80.

Question 39Accountancy

Product A earns a contribution of Ksh 30 per unit and uses 5 machine hours per unit. Product B earns a contribution of Ksh 24 per unit and uses 3 machine hours per unit. Machine hours are the limiting factor. Which product should be given priority, and why?

  1. Neither product, because both should be produced in equal quantities
  2. Product A, because it absorbs more of the scarce resource per unit
  3. Product B, because it earns the higher contribution per machine hour Correct answer.
  4. Product A, because it earns the higher contribution per unit

Explanation

When a single resource is scarce, products are ranked by contribution per unit of the limiting factor, not by contribution per unit. Product A earns Ksh 6 per machine hour while Product B earns Ksh 8 per machine hour, so B is ranked first.

Question 40Accountancy

A process receives 1,000 units at a cost of Ksh 9,200. Normal loss is 10% of input and scrapped units realise Ksh 2 each. Actual output for the period was 850 units. What is the value of the abnormal loss?

  1. Nil
  2. Ksh 500 Correct answer.
  3. Ksh 450
  4. Ksh 900

Explanation

Normal loss is 100 units with scrap proceeds of Ksh 200, so the cost of good output is Ksh 9,200 - Ksh 200 = Ksh 9,000 spread over 900 expected units, giving Ksh 10 per unit. Actual loss is 1,000 - 100 - 850 = 50 units, valued at Ksh 500.

Question 41Finance

Sh 1,000 is invested today at 10% per annum compound interest for two years. What will the investment be worth at the end of the second year?

  1. Sh 1,100
  2. Sh 1,210 Correct answer.
  3. Sh 1,200
  4. Sh 1,331

Explanation

Compound interest applies interest to the accumulated balance, so the value is 1,000 × 1.10 × 1.10 = Sh 1,210. Interest is earned on the first year's interest as well as on the original principal.

Question 42Finance

Which investment appraisal technique is defined as the discount rate at which a project's net present value equals zero?

  1. Internal rate of return Correct answer.
  2. Profitability index
  3. Payback period
  4. Accounting rate of return

Explanation

The internal rate of return is the discount rate that equates the present value of a project's cash inflows with the present value of its outflows, giving an NPV of zero. It is found by solving for the rate rather than by selecting a rate in advance.

Question 43Finance

A company pays a constant annual dividend of Sh 5 per share and its shares are currently trading at Sh 50 each. Using the dividend valuation model with zero growth, the cost of equity is:

  1. 15%
  2. 5%
  3. 20%
  4. 10% Correct answer.

Explanation

With no growth, the cost of equity is the dividend divided by the current ex-dividend market price: 5/50 = 10%. This is simply the dividend yield required by shareholders.

Question 44Finance

A firm reports current assets of Sh 400,000 (including inventory of Sh 100,000) and current liabilities of Sh 250,000. Its current ratio is:

  1. 1.60 Correct answer.
  2. 2.00
  3. 0.63
  4. 1.20

Explanation

The current ratio equals current assets divided by current liabilities: 400,000/250,000 = 1.60. Inventory is not excluded, since that exclusion applies only to the quick ratio.

Question 45Finance

Which of the following is a spontaneous source of short-term finance arising from the normal trading operations of a business?

  1. Trade credit Correct answer.
  2. Debt factoring
  3. Bank overdraft
  4. Commercial paper

Explanation

Trade credit arises automatically when goods are bought on normal credit terms and grows with the level of business activity, so it is described as spontaneous. The other sources require a deliberate negotiation or arrangement with a lender or intermediary.

Question 46Finance

A security that pays a fixed rate of interest but which the holder may exchange for ordinary shares at a predetermined future date is best described as:

  1. Redeemable debenture
  2. Commercial paper
  3. Convertible loan stock Correct answer.
  4. Preference share

Explanation

Convertible loan stock carries a fixed coupon while offering the holder the option to convert into ordinary shares at a set price on set dates. This conversion feature is what distinguishes it from straight debt.

Question 47Finance

In the capital asset pricing model, the beta of the market portfolio is:

  1. One Correct answer.
  2. Greater than one
  3. Zero
  4. Undefined

Explanation

Beta measures the sensitivity of a security's returns to movements in the market, and the market portfolio is the benchmark against which that sensitivity is measured. By construction its beta is therefore 1.0.

Question 48Finance

An investment promises to pay Sh 500 every year in perpetuity. At a discount rate of 10% per annum, its present value is:

  1. Sh 4,545
  2. Sh 500
  3. Sh 50,000
  4. Sh 5,000 Correct answer.

Explanation

The present value of a level perpetuity is the annual cash flow divided by the discount rate: 500/0.10 = Sh 5,000. No growth or fixed term is involved.

Question 49Finance

A company is financed 60% by equity costing 15% and 40% by debt costing 8% before tax. The corporate tax rate is 30%. Its weighted average cost of capital is:

  1. 11.24% Correct answer.
  2. 9.00%
  3. 5.60%
  4. 12.20%

Explanation

The after-tax cost of debt is 8% × (1 − 0.30) = 5.6%. The WACC is therefore (0.60 × 15%) + (0.40 × 5.6%) = 9.00% + 2.24% = 11.24%.

Question 50Finance

A project requires an initial outlay of Sh 100,000 and will generate Sh 40,000 per year for four years. The cost of capital is 10% and the four-year annuity factor at 10% is 3.170. The project's net present value is:

  1. Sh 60,000
  2. Sh 100,000
  3. Sh 126,800
  4. Sh 26,800 Correct answer.

Explanation

The present value of the inflows is 40,000 × 3.170 = Sh 126,800. Deducting the initial outlay gives an NPV of 126,800 − 100,000 = Sh 26,800.