Finance and Investment Appraisal Methods Worksheet

The Accounting Rate of Return (ARR) measures:

• How long it takes to recover an investment

• The return based on accounting profit

• The present value of future cash flows

• The interest rate where NPV is zero

Which method ignores the time value of money?

• NPV

• IRR

• Payback Period

• Discounted Payback Period

A project should be accepted if the NPV is:

• Zero

• Negative

• Positive

• Less than the initial cost

The time value of money means:

• A pound today is worth more than a pound in the future

• Inflation doesn't affect investments

• Money grows by itself

• Timing doesn’t matter

Which technique discounts future cash flows?

• ARR

• Payback Period

• NPV

• ROCE

The decision rule for IRR is:

• Accept if IRR is less than the cost of capital

• Accept if IRR is equal to ARR

• Accept if IRR is greater than the cost of capital

• Accept if IRR is zero

If a project has an NPV of £5,000, what does this mean?

• It breaks even

• It destroys shareholder value

• It adds £5,000 to shareholder value

• It should be rejected

The formula for ARR includes:

• Average cash flow + Initial investment

• Total cash inflow + Project duration

• Accounting profit ÷ Average investment

• NPV + IRR

A limitation of Payback Period is:

• It considers time value of money

• It’s based on profits

• It ignores cash flow timing

• It ignores cash flows after payback

If Project A has a shorter payback but lower NPV than Project B, which should be used to decide?

• Payback only

• IRR only

• NPV, because it measures value added

• ARR, because it’s easiest