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Worksheets3.8 Investment Appraisal ('23)
Total questions: 18
Worksheet time: 23mins
Which of the following statements is false?
The payback period ignores the time value of money
Discount factors indicate the opportunity cost of money received at a future date
The Net Cash Flow (NCF) in an investment project is the profit generated during the lifespan of an investment project
Investments with a positive net present value should be considered on financial grounds
The formula for calculating the payback period is:
Initial cost of investment / ____________ ___ _____
(a)
Which of the following is an example of an investment decision by a construction company?
A decision to purchase a new cement mixing machine
Selling an obsolete timber cutting machine
A decision to pay dividends to its shareholders
Taking out a bank overdraft to ensure sufficient working capital
Which of the following attributes is not an advantage of the payback period method of investment appraisal?
It overlooks the overall profitability of an investment
It is simple and relatively fast to calculate
It helps to estimate how fast the initial investment can be recovered
Managers can easily understand the results
Capital expenditure with the intention of a financial return on this spending at some point in the future. (a)
Assuming interest rates are 10% per annum, what is the net present value of receiving $100 in one year’s time?
$91.09
$90.00
$90.91
$110.00
Which investment appraisal method calculates the value of total discounted net cash flows minus the initial cost of an investment project?
Accounting rate of return
Payback period
Net present value
Discounted cash flows
Which option describes the meaning of investment appraisal?
Determining the payback period of an investment project
Assessing the return of an investment, based on the anticipated profits
Making sure a business has enough money to survive
Evaluating the costs and benefits of proposed investment projects
How is the average rate of return calculated?
Present value of cash inflows less the accounting net book value of the initial investment
Profit after tax in the year of break-even divided by the initial investment
Average annual revenue divided by the initial investment
Average annual net profit divided by the initial investment
What is the correct formula for calculating the payback period?
Gross profit ÷ total sales revenue × 100
Initial investment cost ÷ annual cash flow from investment
Annual cash flow from investment ÷ initial investment cost
Annual cash flow from the investment – original cost of investment
Chrissy Cards considers purchasing a new commercial printer at a cost of $160,000. The business expects total revenue for the next five years to be $360,000. Calculate the average rate of return for the new printer.
30%
20%
25%
15%
Decide whether the following statements are true or false.
(1) The payback period is the amount of time it takes to recover the initial cost of an investment project.
(2) The payback method of investment appraisal is harder to calculate than the net present value method.
(1) True (2) True
(1) True (2) False
(1) False (2) False
(1) False (2) True
Which of the following is not relevant to the payback period method of investment appraisal?
The period of time needed to repay the cost of the investment
The initial cost of the investment
The net cash flow generated from the investment project
The time value of money (TVM) from the investment project
Max’s Macaroons is considering purchasing a patisserie oven at a cost of $12,000. The business expects the useful life of the oven to be 6 years, and forecasts that it will generate revenue of $30,000 over the period. What is the average rate of return?
20%
30%
25%
15%
Which of the following statements about the average rate of return is not correct?
It is also known as the accounting rate of return
It considers the timing of cash inflows
It measures the annual profit generated by a project over a period of time
It measures the annual net return on an investment as a percentage of its capital cost
What is meant by the payback period?
The period over which the investment is expected to earn profit
The amount of time required to prosecute a fraudulent customer
The length of time for an investment project to repay its initial cost outlay
The total cash proceeds from an investment project
A company invests $1.5 million in a new factory. The annual cash flows arising from the investment are $300,000 per annum and the factory is expected to stay operational for 20 years. What is the project’s payback period?
5.6 years
5 years
15 years
10 years
How is the average rate of return calculated?
Average annual net profit ÷ initial investment
Net profit ÷ total sales revenue × 100
Average annual revenue ÷ initial investment
Profit after tax in the year of break-even ÷ initial investment
