Investment Appraisal: Methods and Applications in Business Studies

Question 1

The accounting rate of return is calculated by dividing the:

Accepted Answer

Annual profit after tax by the initial investment

Answer

Present value of future cash flows by the initial investment

Answer

Internal rate of return by the payback period

Answer

Net present value by the accounting profit

Question 2

A project with a positive NPV and a positive IRR is:

Accepted Answer

Acceptable

Answer

Unacceptable

Answer

N/A

Answer

IRR > NPV

Question 3

Which of the following is a sensitivity analysis?

Accepted Answer

Examining how the IRR changes in response to changes in input variables

Answer

Using a computer program to calculate the NPV of a project

Answer

Creating a cash flow forecast for a project

Answer

Determining the project's payback period

Question 4

Which of the following accurately describes the purpose of Discounted Cash Flow (DCF) analysis?

Accepted Answer

DCF accounts for the varying timing of cash flows by adjusting them to their present value.

Answer

DCF is primarily employed for evaluating short-term investments.

Answer

DCF always utilizes a discount rate that reflects zero risk.

Answer

DCF is seldom applied in practical investment decision-making.

Question 5

Which of the following is **NOT** a recognized method of investment appraisal?

Accepted Answer

Internal rate of growth

Answer

Payback period

Answer

Accounting rate of return

Answer

Net present value

Question 6

When evaluating the results of an investment appraisal, which factor is most crucial in guiding investment decisions?

Accepted Answer

Net Present Value (NPV)

Answer

Payback Period

Answer

Accounting Rate of Return (ARR)

Answer

Internal Rate of Return (IRR)

Question 7

Which is the primary advantage of using the payback period method of investment appraisal?

Accepted Answer

Simple and straightforward calculation

Answer

Considers the full lifespan of the project

Answer

Accounts for the time value of money

Answer

Facilitates comparison of projects with different sizes

Question 8

Which factor does NOT influence the calculation of the accounting rate of return (ARR) of an investment project?

Accepted Answer

Firm's cost of capital

Answer

Project duration

Answer

Initial investment amount

Answer

Depreciation method used

Question 9

Express the formula for calculating the net present value (NPV) of an investment project.

Accepted Answer

NPV = -Initial investment + Σ[(Cash inflows / (1 + Discount rate)^n)]

Answer

NPV = Initial investment + Σ[(Cash inflows * Discount rate)^n]

Answer

NPV = -Initial investment + Σ[(Cash outflows / (1 + Discount rate)^n)]

Answer

NPV = Initial investment - Σ[(Cash outflows * Discount rate)^n]

Question 10

What is the purpose of carrying out sensitivity analysis in investment appraisal?

Accepted Answer

To examine the impact of changing assumptions on the appraisal outcome

Answer

To eliminate the need for accurate data in the appraisal

Answer

To ensure the accuracy of the appraisal results

Answer

To determine the best investment option without fail

Question 11

Which of the following is NOT a method of investment appraisal?

Accepted Answer

Profitability index

Answer

Net present value

Answer

Internal rate of return

Answer

Payback period

Question 12

Which investment appraisal method provides the most comprehensive analysis of an investment proposal?

Accepted Answer

Net present value

Answer

Payback period

Answer

Accounting rate of return

Answer

Internal rate of return

Question 13

Which investment appraisal method calculates the present value of future cash flows using a discount rate?

Accepted Answer

Net present value

Answer

Payback period

Answer

Accounting rate of return

Answer

Internal rate of return

Question 14

Which investment appraisal method determines the discount rate that makes the net present value of an investment equal to zero?

Accepted Answer

Internal rate of return

Answer

Payback period

Answer

Accounting rate of return

Answer

Net present value

Question 15

Which investment appraisal method is most appropriate for short-term investments with a low risk profile?

Accepted Answer

Payback period

Answer

Accounting rate of return

Answer

Net present value

Answer

Internal rate of return

Question 16

Which investment appraisal method directly accounts for the time value of money?

Accepted Answer

Net Present Value

Accepted Answer

Internal Rate of Return

Answer

Payback Period

Answer

Accounting Rate of Return

Question 17

Which of the following is not included in the primary methods of investment appraisal?

Accepted Answer

Profitability index

Answer

Payback period

Answer

Net present value

Answer

Internal rate of return

Question 18

What is the accounting rate of return (ARR) of an investment that costs £10,000 and generates annual profits of £2,000 for five years?

Accepted Answer

20%

Answer

10%

Answer

30%

Answer

40%

Question 19

Which of the following is **not** a limitation of the payback period method of investment appraisal?

Accepted Answer

Provides a clear indication of the absolute profitability of an investment

Answer

Ignores the time value of money

Answer

Can be sensitive to the timing of cash flows

Answer

Assumes that all cash flows are received at the end of each year

Question 20

The internal rate of return (IRR) of an investment is the discount rate that makes the NPV of the investment:

Accepted Answer

Zero

Answer

Positive

Answer

Negative

Answer

Equal to the hurdle rate

Question 21

Which of the following is **not** a qualitative factor that should be considered when evaluating an investment?

Accepted Answer

Net present value

Answer

Market demand for the product

Answer

Risk of technological obsolescence

Answer

Impact on the environment

Question 22

Scenario analysis is a technique used to assess the impact of different possible future scenarios on the results of an investment appraisal.

Accepted Answer

True

Answer

False

Question 23

The hurdle rate is the **minimum** acceptable rate of return that a company requires before it will approve an investment.

Accepted Answer

True

Answer

False

Question 24

The process of comparing the estimated cash flows of an investment with the investment's initial cost is known as:

Accepted Answer

Investment appraisal

Answer

Sensitivity analysis

Answer

Financial analysis

Answer

Risk assessment

Question 25

Which of the following is NOT a method of investment appraisal?

Accepted Answer

Consumer analysis

Answer

Net present value (NPV)

Answer

Payback period

Answer

Accounting rate of return (ARR)

Question 26

The payback period of an investment is the period of time it takes for the initial investment to be recovered from the **future** cash inflows generated by the investment.

Accepted Answer

True

Answer

False

Question 27

Which of the following is not used to evaluate investments?

Accepted Answer

Return on investment

Answer

Payback period

Answer

Net present value

Answer

Internal rate of return

Question 28

What is the payback period of an investment with an initial investment of £10,000 and annual cash inflows of £2,500?

Accepted Answer

2 years

Answer

4 years

Answer

5 years

Answer

6 years

Question 29

Which of these is the most commonly used investment appraisal technique?

Accepted Answer

Net present value

Answer

Payback period

Answer

Accounting rate of return

Answer

Internal rate of return

Question 30

Which of the following is NOT a widely used method of investment appraisal?

Accepted Answer

Return on capital employed

Answer

Payback period

Answer

Accounting rate of return

Answer

Net present value

Question 31

What is the payback period of an investment that costs £10,000 and generates annual cash flows of £2,000?

Accepted Answer

5 years

Answer

7 years

Answer

9 years

Answer

11 years

Question 32

What is the net present value of an investment that costs £10,000 and generates annual cash flows of £2,000 at a discount rate of 10%?

Accepted Answer

£6,145

Answer

£7,360

Answer

£8,575

Answer

£9,790

Question 33

Which of the following is NOT a factor that affects the internal rate of return?

Accepted Answer

Risk appetite of the business

Answer

Size of the initial investment

Answer

Discount rate used

Answer

Timing of cash flows

Question 34

What is the internal rate of return of an investment that costs £10,000 and generates annual cash flows of £2,000 for 10 years?

Accepted Answer

9.43%

Answer

8.51%

Answer

10.35%

Answer

11.27%

Question 35

What is the primary purpose of the capital budgeting process?

Accepted Answer

To identify and evaluate potential investment opportunities

Answer

To raise finance for investment projects

Answer

To manage the day-to-day cash flow

Answer

To forecast future financial performance

Question 36

Which of the following is NOT a benefit of using a structured approach to investment appraisal?

Accepted Answer

Guarantees a positive return on investment

Answer

Helps to make more informed investment decisions

Answer

Reduces the risk of making poor investment decisions

Answer

Provides a consistent and transparent basis for decision-making

Question 37

The payback period refers to the duration it takes for an investment to generate enough cash flow to cover its initial cost.

Accepted Answer

True

Answer

False

Question 38

Which of the following is NOT an advantage of using the NPV method?

Accepted Answer

Involves complex calculations

Answer

Considers the time value of money

Answer

Allows for comparison of different investments

Answer

Takes into account all cash flows

Question 39

The internal rate of return (IRR) is the discount rate that makes the NPV of an investment equal to zero.

Accepted Answer

True

Answer

False

Question 40

The investment appraisal process should be regularly reviewed and updated to ensure it remains relevant and effective.

Accepted Answer

True

Answer

False

Question 41

Which of the following is NOT a method of investment appraisal typically used in the United Kingdom?

Accepted Answer

Benefit-cost ratio

Answer

Payback period

Answer

Accounting rate of return

Answer

Net present value

Question 42

What does the payback period measure?

Accepted Answer

The time it takes for an investment to generate enough cash flow to cover its initial cost

Answer

The average annual rate of return on an investment

Answer

The present value of future cash flows discounted at a given rate

Answer

The rate of return at which the net present value of an investment is zero

Question 43

Which of the following is a disadvantage of using the NPV method of investment appraisal?

Accepted Answer

It requires a higher level of sophistication than other methods

Answer

It does not take into account the time value of money

Answer

It is not as accurate as other methods

Answer

It is only suitable for long-term investments

Question 44

What is the internal rate of return (IRR) of an investment?

Accepted Answer

The discount rate at which the net present value of an investment is zero

Answer

The average annual rate of return on an investment

Answer

The difference between the present value of the future cash flows and the initial cost of the investment

Answer

The length of time it takes for an investment to generate enough cash flow to cover its initial cost

Question 45

Which of the following is a limitation of the IRR method of investment appraisal?

Accepted Answer

It can sometimes give multiple answers

Answer

It does not take into account the time value of money

Answer

It is not suitable for long-term investments

Answer

It is difficult to understand and use

Question 46

Which of the following statements about investment appraisal is most accurate?

Accepted Answer

It involves considering both quantitative and qualitative factors.

Answer

It is an exact science that can guarantee the success of an investment.

Answer

The most appropriate method of appraisal will always be the one that produces the highest return.

Answer

It is only necessary to consider the initial investment cost when making an appraisal.

Question 47

What is the primary purpose of a sensitivity analysis in investment appraisal?

Accepted Answer

To identify risks and uncertainties associated with the investment.

Answer

To determine the break-even point of the investment.

Answer

To calculate the payback period of the investment.

Answer

To forecast future cash flows of the investment.

Question 48

Which of the following is NOT an advantage of using the internal rate of return method of investment appraisal?

Accepted Answer

It is straightforward to calculate.

Answer

It considers the time value of money.

Answer

It can be used to rank mutually exclusive investments.

Answer

It is a more accurate measure of profitability than the payback period.

Question 49

The payback period refers to the length of time required for an investment to generate enough cash flow to cover its initial cost.

Accepted Answer

True

Answer

False

Question 50

Which of the following factors is **not** included in the calculation of ARR?

Accepted Answer

Present value of future cash flows

Answer

Net income

Answer

Average investment

Answer

Depreciation

Question 51

The internal rate of return (IRR) of an investment is the discount rate that results in a:

Accepted Answer

Zero NPV

Answer

Positive NPV

Answer

Negative NPV

Answer

Constant NPV

Question 52

The payback period for a project refers to the time it takes to recover the initial investment, including both principal and interest.

Accepted Answer

True

Answer

False

Question 53

Which of the following is **NOT** a limitation of the accounting rate of return (ARR) method in investment appraisal?

Accepted Answer

It can account for the risk associated with different investments.

Answer

It ignores the time value of money.

Answer

It assumes that cash flows are evenly distributed over the project's life.

Answer

It may lead to incorrect investment decisions.

Question 54

Which of the following is **NOT** an advantage of using the net present value (NPV) method?

Accepted Answer

It is not affected by the scale of the investment.

Answer

It takes into account the time value of money.

Answer

It considers all cash flows over the project's life.

Answer

It is relatively easy to calculate and interpret.

Question 55

The internal rate of return (IRR) of a project is the discount rate that makes the NPV of the project equal to:

Accepted Answer

Zero

Answer

One

Answer

The initial investment

Answer

The payback period

Question 56

Which of the following is **NOT** a potential challenge in using the IRR method?

Accepted Answer

It is widely accepted and used in investment appraisal.

Answer

It can lead to multiple IRRs for a single project.

Answer

It may not always reflect the true profitability of a project.

Answer

It can be difficult to calculate, especially for complex projects.

Question 57

In investment appraisal, it is important to consider:

Accepted Answer

Both financial and non-financial factors

Answer

Financial factors only

Answer

Non-financial factors only

Answer

Neither financial nor non-financial factors