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WorksheetsIB Business Management - 3.8 Investment Appraisal Quiz - SL
Total questions: 20
Worksheet time: 8mins
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
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
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%
One disadvantage of Payback Period is that it:
Does not consider cash flows after the payback point
Is difficult to calculate
Is not useful for short-term investments
Takes too long to compute
Which investment appraisal method is more useful when comparing projects with different time spans?
Payback Period
Average Rate of Return
Both are equally useful
Neither are useful
Why might a business prefer Payback Period over ARR?
It is better for comparing long-term profitability
It accounts for external economic factors
It helps assess risk and liquidity quickly
It considers the time value of money
Which of the following is a limitation of ARR?
It ignores the initial investment
It ignores cash inflows after payback
It does not consider the time value of money
It is difficult to interpret
A business is choosing between two investment projects:
Project A: Payback Period = 3 years, ARR = 10%
Project B: Payback Period = 2 years, ARR = 8%
Which of the following is a correct conclusion?
Project A is better because it has a higher ARR
Project B is better because it has a shorter Payback Period
Project A and B are equally good investments
More information is needed to decide
If a business prioritizes liquidity and risk reduction, which method should they use?
Payback Period
Average Rate of Return
Both equally
Neither
A company investing in a long-term project with fluctuating returns should rely more on:
Payback Period
ARR
Both equally
None
If a company wants to measure the overall profitability of an investment, which method should they prefer?
Payback Period
ARR
Both equally
None
Why do many businesses use both Payback Period and ARR?
To balance risk and profitability analysis
Because both are easy to calculate
To account for inflation
To impress investors
Which of the following factors should NOT influence the choice of investment appraisal method?
Industry trends
Company risk tolerance
Personal preferences of the CEO
Business objectives
