Investment Appraisal Quiz

What is investment appraisal?

• Assessing the value of current assets

• Comparing profits after tax

• Evaluating the return on investment

• Calculating the net cash inflow

Which method of investment appraisal calculates the average profits earned on the initial investment?

• Internal Rate of Return

• Payback Period

• Net Present Value

• Accounting Rate of Return

What is the formula for calculating the Accounting Rate of Return?

• Initial investment £/residual value

• Total profit/number of years

• Net cash inflow/initial investment £

• Average profit £/initial investment £

What is residual value?

• The value of a non-current asset at the start of the project

• The value of a non-current asset at the end of the project

• The total profit earned from the project

• The net cash inflow after depreciation

Which method of investment appraisal assesses the time taken to pay back the investment?

• Net Present Value

• Accounting Rate of Return

• Payback Period

• Internal Rate of Return

What is the advantage of the payback method?

• Difficult to accurately calculate the amount of net cash flows

• Ignores net cash inflow after the payback period

• Ignores overall profitability on a project

• Considers net cash inflows rather than profits

What does the Accounting Rate of Return method use to evaluate projects?

• Net present value

• Equity invested in the project

• Profits after tax

• Net cash inflows

What is the disadvantage of the Accounting Rate of Return method?

• Ignores the timing value of money

• Suitable for comparing projects with greatly different investment amounts

• Compatible with the Return on Equity Employed accounting ratio

• Gives guidance on an acceptable rate of return

What does the Payback method calculate?

• The accounting rate of return of a project

• The internal rate of return of a project

• The net present value of a project

• The length of time a project takes to pay for itself

What is the benefit of a shorter payback period?

• Considers overall profitability on a project

• Ignores the timing value of money

• Reduces liquidity risk involved in the investment

• Ignores net cash inflow after the payback period