BH_3.8

Identify the statement that best describes the payback period.

• The average profit of the project divided by the initial investment amount

• The sum of discounted cash flows less the initial investment cost

• The time required for a project to complete without any delays

• The time required for an investment to earn enough profit to cover the initial investment cost

Identify the most preferable payback period for a mining firm from the following options.

• 18 months

• 24 months

• 48 months

• 60 months

Identify the method used to calculate the payback period when the annual net cash flows are constant.

• [(Initial investment cost – Net cash flows) / Number of years] × 100

• Initial investment cost / Net cash flows

• (Initial investment cost / Net cash flows) × 100

• Net cash flows / Initial investment cost

Calculate the payback period for a project that is expected to return a net cash flow of $350,000 per year with an initial investment cost of $1.5 million.

• 0.23 years

• 3.5 years

• 4 years

• 4.29 years

Identify the method used to calculate the payback period when the annual net cash flows from an investment project varies from year to year.

• Initial investment / Net cash flows (NCF)

• Year prior to break-even – Net cash flow in break-even year

• Year prior to break even + $ amount to break-even _ . Net cash flow in break-even year

• Year prior to break even + Net cash flow in break-even year $ amount to break-even

Using the table of forecasted net cash flows below, calculate the payback period on a project with an initial investment cost of $2,750,000.

• 3 years

• 3 years 6 months

• 3 years 10 months

• 4 years

Using the table of forecasted net cash flows (NCF) below, calculate the payback period on a project with an initial investment cost of $8,880,000.

• 2.55 years

• 2.75 years

• 2.87 years

• 3.00 years

Identify the correct disadvantage of using the payback period.

• It only focuses on a firm’s liquidity

• It does not focus on a firm’s profitability

• It is difficult to make comparisons between different projects

• It is difficult and time consuming to calculate

Identify a strength of using the payback period as a method of investment appraisal.

• It considers the time value of money from an investment project

• It enables comprehensive comparisons between different projects

• It focuses on a firm’s liquidity position

• It focuses on a firm’s profitability position

Using the table of forecasted profits below, calculate the average rate of return (ARR) on a project with a capital cost of $8,880,000.

• 2.87%

• 3.22%

• 27.89%

• 28.22%