Net Present Value Quiz

What is the primary purpose of the Net Present Value method in investment appraisal?

• To assess the profitability of an investment by comparing present and future cash flows.

• To evaluate the risk associated with an investment.

• To determine the initial cost of an investment.

• To calculate the total future cash flows of an investment.

Why is a pound received today considered more valuable than a pound received in the future?

• Because future money is always less secure.

• Because money today can be invested to earn interest.

• Because inflation decreases the value of future money.

• Because future money is subject to higher taxes.

What role do discount factors play in calculating the present value of future cash flows?

• They are used to calculate the total future cash flows.

• They determine the interest rate for future investments.

• They are used to multiply future cash flows to find their present value.

• They increase the future cash flows.

In the window cleaning business example, what was the result of the NPV calculation?

• A negative NPV indicating a non-viable investment.

• An NPV that was not calculated.

• A positive NPV indicating a profitable investment.

• An NPV of zero indicating a break-even investment.

What is the initial investment required for Project Pasta in the restaurant business example?

• £50,000

• £100,000

• £75,000

• £25,000

Which project had a higher NPV in the restaurant business example?

• Project Pizza

• Project Pasta

• Both projects had the same NPV

• Neither project had a positive NPV

What is one advantage of using NPV in investment appraisal?

• It does not require any assumptions about future cash flows.

• It only considers the initial investment cost.

• It provides a single value for easy comparison of investments.

• It ignores the time value of money.

What is a limitation of the NPV method?

• It does not allow for comparison between different projects.

• It is only applicable to short-term investments.

• It requires accurate estimation of future cash flows.

• It does not consider the time value of money.

How does NPV enable sensitivity analysis?

• By allowing assessment of the impact of changes in discount rates or cash flow projections.

• By ignoring changes in discount rates.

• By eliminating the need for future cash flow projections.

• By providing a fixed value for all investments.

Why is the selection of an appropriate discount rate important in NPV calculations?

• It has no impact on the NPV result.

• It only affects the initial investment cost.

• It can significantly affect the NPV and lead to flawed decisions if chosen incorrectly.

• It is used to calculate the total future cash flows.