Investment Appraisal Techniques

The Payback Period (PBP) will always select the investment that

• Gives the highest rate of return

• Returns the cost of investment first

• Has the highest total net cash flow

Which of the following is NOT relevant to the use of the NPV method of investment appraisal?

• It relies on discounted cash flows

• It’s expressed as a percentage for easier comparison

• Its value will fall if interest rates rise

• A financially viable investment has a positive value

Which TERM refers to the numerical value needed to calculate the NPV of an investment?

• Ratio

• Net cash flow

• Discounted cash flows

• Discount factor

The initial investment is £5,000. In the first year the firm paid back £1,000 in the second year £2,000 and the third year 3,000. The payback period for the investment is:

• 2 years

• 3 years

• 3 years 4 months

• 2 years 8 months

The following are all methods of investment appraisal, EXCEPT:

• Payback period

• Balance sheet return

• Net present value

• Discounted Payback period

NPV will be positive if

• Companies work hard

• Discounted cash flows justify initial investment

• Money is given back

• They won't be

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

Which of the following will not be a relevant factor when using the payback method of capital investment appraisal?

• The cash flows generated by the asset up to the payback period

• The cost of the asset

• The timing of the first cash inflow

• The total cash flows generated by the asset

Popps Ltd is considering the purchase of an asset for £120,000. This asset will generate the following cash flows:

£

Year 1 15,000

Year 2 25,000

Year 3 40,000

Year 4 40,000

Year 5 35,000

Year 6 30,000

Using a discount rate of 20% the discounted payback period would be:

• 4 years

• 6 years

• The investment does not pay back

• 5 years

The discount factor used to appraise capital investment decisions is a measure of:

• The current high street interest rate

• The opportunity cost of capital of the business

• The current inflation rate

• The opportunity cost of capital of all businesses in the same industry