CIMA Risk Management P3 Question # 22 Topic 3 Discussion

CIMA Risk Management P3 Question # 22 Topic 3 Discussion

P3 Exam Topic 3 Question 22 Discussion:
Question #: 22
Topic #: 3

P Ltd, a manufacturing company, is considering a new capital investment project to set up a new production line. The initial appraisal shows a healthy net present value of $6,465 million at a discount rate of 10% as shown in the table below:

However, management is unsure about the demand for the product which will be produced and has insisted that the future revenues should be reduced to certainity equivalents by taking 70%, 65% and 60% of the years 1,2, and 3 cash inflows respectively.

What should P do?


A.

Proceed with the project, it has a healthy net present value.


B.

Stop the project, it has considerable risk.


C.

Put pressure on sales and marketing to re-verify their forecasts.


D.

Re-appraise the project using other capital appraisal techniques to get a more balanced view.


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