Topic 3.8: Investment Appraisal Questions

A business chooses Project X because it has a shorter payback than Project Y. Identify one risk of relying mainly on payback and explain how using ARR alongside payback could improve the decision.

A business is considering buying equipment for $60,000. It expects net cash inflows of $18,000 per year for four years. a) Calculate the payback period. b) State one advantage and one disadvantage of using payback to make this decision.

Explain one situation in which payback would be a suitable investment appraisal method.

Two projects have the same payback period of 3 years. Give one reason why a manager might still prefer one project over the other.

A machine costs $90,000. Over 5 years, total net cash inflows are expected to be $130,000. a) Calculate the total profit from the investment. b) Calculate the average annual profit. c) Calculate ARR.

Explain one advantage and one disadvantage of ARR as an investment appraisal method.

Two projects have the same ARR of 14%. One returns most profits in years 1–2; the other returns most profits in years 4–5. Explain why ARR alone may not be enough to choose between them.

A business is choosing between two machines. The cheaper machine has slightly lower ARR, but the supplier offers excellent after-sales service and training. Explain two qualitative factors that could influence the final decision.

A business is considering buying equipment for $60,000. It expects net cash inflows of $18,000 per year for four years. a) Calculate the payback period. b) State one advantage and one disadvantage of using payback to make this decision.

Explain one situation in which payback would be a suitable investment appraisal method.

Two projects have the same payback period of 3 years. Give one reason why a manager might still prefer one project over the other.

A machine costs $90,000. Over 5 years, total net cash inflows are expected to be $130,000. a) Calculate the total profit from the investment. b) Calculate the average annual profit. c) Calculate ARR.

Explain one advantage and one disadvantage of ARR as an investment appraisal method.

Two projects have the same ARR of 14%. One returns most profits in years 1–2; the other returns most profits in years 4–5. Explain why ARR alone may not be enough to choose between them.

A business is choosing between two machines. The cheaper machine has slightly lower ARR, but the supplier offers excellent after-sales service and training. Explain two qualitative factors that could influence the final decision.

A business chooses Project X because it has a shorter payback than Project Y. Identify one risk of relying mainly on payback and explain how using ARR alongside payback could improve the decision.

A project costs $50,000. Net cash inflows are: Year 1 $12,000, Year 2 $16,000, Year 3 $20,000, Year 4 $10,000. Calculate the payback period (show your working).

A start-up is choosing between two projects. Project A: Payback 2.5 years, ARR 9%. Project B: Payback 4 years, ARR 17%. Recommend which project to choose for: a) a cash-strapped start-up, b) a well-funded established business. Justify your answers.

A manager says: “We should always choose the investment with the highest ARR.” Evaluate this statement.

A business requires a minimum ARR of 12% for new investments. A project has an ARR of 10.5%. Recommend a decision and explain one reason why managers might still accept the project.