Cambridge International A Level · Accounting (9706)

Investment appraisal: Practice Questions

3 multiple-choice questions marked as you go, and 3 written questions with worked solutions. All on Investment appraisal.

6 questions17 marksFree, no account

Question 1

1 mark

Which of the following is a significant disadvantage of using the payback period method for investment appraisal?

Question 2

1 mark

A business is considering a capital investment. Which of the following best describes the payback period?

Question 3

1 mark

A project has a Net Present Value (NPV) of exactly zero when discounted at a cost of capital of $12\%$.

Which of the following statements is correct?

Question 4

2 marks

Define the payback period and state one reason why a business with liquidity concerns might prefer this method over the Net Present Value (NPV) technique.

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Question 5

5 marks

Alpha Limited is considering the purchase of a new machine costing $\$80\,000$. It is expected to have a useful life of four years with no residual value. The estimated net cash inflows are as follows:
Year 1: $\$25\,000$
Year 2: $\$35\,000$
Year 3: $\$30\,000$
Year 4: $\$20\,000$

(a) Calculate the payback period for the machine in years and months.
(b) Calculate the accounting rate of return (ARR) for the investment using the average investment method, where the average investment is calculated as half of the initial cost.

Write your answer out first, then check it against the worked solution.

Question 6

7 marks

Beta Plc is evaluating a capital project requiring an initial outlay of $\$220\,000$. The project is expected to generate the following net cash inflows:
Year 1: $\$70\,000$
Year 2: $\$90\,000$
Year 3: $\$80\,000$
Year 4: $\$60\,000$

The company's cost of capital is $10\%$.

Discount factors:
Year 1: $10\% = 0.909$; $15\% = 0.870$
Year 2: $10\% = 0.826$; $15\% = 0.756$
Year 3: $10\% = 0.751$; $15\% = 0.658$
Year 4: $10\% = 0.683$; $15\% = 0.572$

(a) Calculate the Net Present Value (NPV) of the project using the $10\%$ discount rate.
(b) Calculate the Internal Rate of Return (IRR) of the project. (Note: You will first need to calculate the NPV at the $15\%$ discount rate).
(c) Advise the directors whether the project should be accepted based on your calculations in parts (a) and (b), giving reasons for your answer.

Write your answer out first, then check it against the worked solution.

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