IB Business Management - 3.8 Investment Appraisal Quiz - SL

What does the Payback Period (PBP) measure in investment appraisal?

• The total profit generated by an investment

• The time taken to recover the initial investment

• The total cash inflow from an investment

• The interest earned on an investment

The Average Rate of Return (ARR) is calculated as:

• Total profit ÷ Initial investment × 100

• Annual Profit ÷ Total Profit × 100

• Average Annual profit ÷ Initial investment × 100

• Net profit ÷ Initial investment × 100

Which of the following statements about Payback Period is true?

• A longer payback period is preferable

• A shorter payback period reduces investment risk

• Payback Period considers the profitability of an investment

• Payback Period accounts for the time value of money

The main advantage of using Payback Period is:

• It considers the profitability of the investment

• It accounts for cash flows beyond the payback period

• It is simple and quick to calculate

• It considers the time value of money

One of the key limitations of the Average Rate of Return (ARR) is that:

• It ignores the profitability of an investment

• It does not consider all cash inflows

• It does not consider the time value of money

• It is difficult to calculate

6. A business invests $50,000 in a project that generates the following annual cash inflows:

   • Year 1: $10,000

   • Year 2: $15,000

   • Year 3: $50,000

   • Year 4: $20,000

   • What is the Payback Period of the investment?

• 2 years

• 2.5 years

• 3 years

• 3.5 years

A company invests $60,000 in a project with an expected total net profit of $30,000 over 5 years. What is the ARR?

• 5%

• 8%

• 10%

• 12%

A business invests $40,000 in a project with expected average annual profits of $5,000. What is the ARR?

• 10%

• 12.5%

• 15%

• 20%

A project costs $100,000 and generates cash inflows of $20,000 per year. What is the Payback Period?

• 3 years

• 4 years

• 5 years

• 6 years

6. A business invests $50,000 in a project that generates the following annual cash inflows:

   • Year 1: $10,000

   • Year 2: $15,000

   • Year 3: $50,000

   • Year 4: $20,000

What is the ARR of the investment?

• 47.5%

• 22.5%

• 190%

• 20%