4. Finance

Investment Appraisal — Quiz

Test your understanding of investment appraisal with 5 practice questions.

Practice Questions

Question 1

What does a profitability index (PI) of 0.85 indicate for a proposed project?

Question 2

A company estimates an average annual accounting profit of £6,000 from a project that costs £40,000 and has a 5-year life. What is the Accounting Rate of Return (ARR)?

Question 3

Which appraisal method assumes that interim cash flows are reinvested at the firm’s cost of capital rather than at the project’s own return rate?

Question 4

Which limitation of the Internal Rate of Return (IRR) method may lead to incorrect ranking of mutually exclusive projects?

Question 5

A project requires an initial investment of £15,000 and generates cash inflows of £6,000 at end of Year 1, £8,000 at end of Year 2, and £5,000 at end of Year 3. Calculate the NPV at a discount rate of 8% (use two decimal places).