Higher Accounting - Investment Appraisal

In Higher Accounting investment is the process of ...

• buying new non current assets
• buying new current assets
• putting money in a bank account
• disposing of unwanted assets

There are two main techniques when choosing between two investment projects - the payback methods and ...

• Accounting Rate of Return
• Investment Rate of Return
• Profitability Comparison
• Return on Capital Employed

Which is NOT a disadvantage of using the ARR method to compare investment opportunities?

• It does not take into account the time value of money
• It is unreliable if timescales between projects are different
• There is no target rate of return to compare with
• It is difficult to calculate and hard to understand

Accounting rate of return method uses the average profits (after tax and depreciation) over the years divided by the original investment cost x 100%.
True or false?

• True
• False

The Payback method of Investment Appraisal focuses on which option reimburses its own costs the quickest.
True or false?

• True
• False

In calculating the Payback Period we always round down to the nearest day.
True or false?

• True
• False

Which is NOT an advantage of using the Payback method to choose between investment options?

• It focuses on profitability and ignores cash flow
• Reduces the time during which liquidity is risked
• Easy to understand and calculate
• May encourage growth by favouring quick return projects

The amount of time taken to generate sufficient cash to cover its own investment costs is called ...

• Return period
• Payback period
• Depreciation period
• Investment period