ACCA Applied Knowledge (BT, MA, FA) · Management Accounting (MA)

Investment appraisal

8 practice questions, each with the answer and an explanation.

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Random questions from this topic, one at a time. You see the answer and the explanation straight after each one.

All 8 questions

  1. A project costs £120,000 and generates cash inflows of £20,000, £40,000, £50,000 and £60,000 in years 1 to 4. Cash flows arise evenly through each year. What is the payback period?
  2. A project costs £50,000 and produces an annual cash inflow of £18,000 for 4 years. The cost of capital is 10% and the 4-year annuity factor at 10% is 3.170. What is the net present value?
  3. A project has a net present value of +£4,000 at a discount rate of 10% and −£2,000 at 20%. Using linear interpolation, what is the approximate internal rate of return (IRR)?
  4. A project has a positive NPV when its cash flows are discounted at the company's cost of capital. What does this tell management?
  5. A project costs £90,000 and has a residual value of £10,000 after 5 years. Total profits over the 5 years are £60,000 after charging depreciation. What is the accounting rate of return (ARR) based on…
  6. Which of the following cash flows should be excluded when calculating the net present value of a project?
  7. A company is considering a project that needs £20,000 additional working capital at the start, which will be recovered at the end of year 3. How is this treated in the NPV calculation?
  8. A project costs £80,000. It produces cash inflows of £30,000, £35,000, £40,000 and £20,000 in years 1 to 4, and the equipment is sold for £5,000 at the end of year 4. The discount factors at 12% are 0…

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