Unit 3.8 Investment appraisal

Investment appraisal...

• looks at how to answer the question 'is it worth investing in that project?’

• refers to the quantitative techniques used to calculate the financial costs and benefits of an investment decision.

• evaluates the profitability or desirability of an investment project.

• all

• none

What is a disadvantage of the ARR?

• It ignores the timing of the cash flow

• It focuses on profitability which is the central objective of many business decisions

• None are correct

All the techniques used to appraise investment projects require forecasts to be made of future cash flows. These figures are referred to as__________

• gross cash flows

• net cash flows

• fixed assets

• current liabilities

Payback period is...

• length of time it takes for the net cash inflows to pay back the original capital cost of the investment

• an act of revenge or retaliation

• the amount customers need to pay per unit in order for the firm to break-even or to reach a particular target profit

Why is it important to calculate the payback of a project?

• it demonstrates how cash flows received in the future have less real value than cash flows today, owing to inflation.

• It shows the movement of an organization’s cash inflows and cash outflows.

• on a balance sheet it reveals the liquidity position of a business, which is found by using the formula: Current assets – Current liabilities.

Average rate of return (ARR) measures the annual profitability of an investment as a percentage of the initial investment

• true

• false

Criterion rate or level is the minimum level (maximum for payback period) set by management for investment appraisal results for a project to be accepted

• true

• false

Supreme Computing Inc. is considering spending $71,500 on new 3D printers. The annual contribution from this investment is forecast to be $33,000. Calculate the payback period for Supreme Computing Inc.

• 23 months

• 26 months

• 2 years and 6 months

Lewis & Co. is considering whether to pay for an annual subscription to an advertising agency at a total cost of $80,800 for the next 5 years. The advertising agency predicts the net cash inflow from this will be $28,200 of additional income per year for the firm. Calculate the payback period for Lewis & Co

• 37 months

• 3 years

• 34.4 months

• none of the above

Sparks Education Company (SEC) is considering whether to replace its photocopiers and printers for a total cost of $95,000. The total profit from the project is $142,000 at the end of 5 years. Calculate the average rate of return

• 66.9%

• 8.98%

• 9.89%