1
3 marks
Explain why a business carries out investment appraisal before committing to a major project.
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Investment Appraisal (A Level) (Cambridge (CIE) A Level Business): Exam Questions
Exam code: 9609
1 hour18 questions
2
2 marks
Define the term 'payback period'.
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3
3 marks
Explain one advantage to a business of using the payback method.
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4
2 marks
Define the term 'accounting rate of return'.
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5
3 marks
Explain one limitation of the accounting rate of return.
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6
2 marks
Define the term 'net present value'.
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7
3 marks
Explain why a business discounts future cash flows when appraising an investment.
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8
3 marks
Explain what a positive net present value tells a business about an investment.
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9
3 marks
Explain one qualitative factor a business should consider before making a major investment.
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10
3 marks
Explain one reason why a business might use more than one investment appraisal method.
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1
3 marks
Read the following extract (Table 1)before answering
Using the data in Table 1, calculate the payback period for the production line project.
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2
3 marks
Read the following extract (Table 2) before answering
Calculate the forecast net present value (NPV), for the ready meals project.
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3
3 marks
Read the following extract (Appendix 2) before answering
Calculate the forecast net present value (NPV) of the proposed pizza van project over four years.
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4
3 marks
Read the insert (opens in a new tab)before answering this question.
Calculate the average rate of return (ARR) for Project A.
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5
3 marks
Read the insert (opens in a new tab)before answering questions 3a, 3b and 3c
Calculate the average rate of return (ARR) for Project A.
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1
12 marks
Case Study
Torrin
Torrin hires out excavators and diggers to builders in country N. It is choosing between two machines, each costing $240 000.
Table 1.1 Forecast net cash inflows ($)
Machine A | Machine B | |
|---|---|---|
Year 1 | 110 000 | 40 000 |
Year 2 | 100 000 | 60 000 |
Year 3 | 40 000 | 90 000 |
Year 4 | 20 000 | 120 000 |
Year 5 | 10 000 | 140 000 |
Torrin's finance director appraises every project using payback alone, and applies a rule that an investment must pay back within three years. Machine A pays back in 2 years 9 months and Machine B in 3 years 5 months.
Torrin has an overdraft of $90 000 which its bank has asked it to reduce. Machine B is a newer model with lower emissions, and country N introduces emissions rules for hire equipment in 2029.
Torrin's owner says the business has always used payback and it has never let them down.
Evaluate whether Torrin should continue to rely on the payback method when choosing between the two machines.
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2
12 marks
Case Study
Radlett Timber
Radlett Timber runs a sawmill in country S, employing 60 people. It is the largest employer in its town. Its customers are furniture makers who buy from Radlett because it supplies hand-finished, made-to-order timber.
Radlett is choosing between two investments:
Option 1: an automated cutting line. Net present value $620 000. It would replace 22 of the 60 workers and produces standard sizes only.
Option 2: upgrading the existing line. Net present value $310 000. No redundancies.
Radlett's directors promised employees in 2025 that there would be no compulsory redundancies before 2028.
The automated line's net present value assumes the mill runs at 85% capacity. Over the last three years Radlett has averaged 68%.
Evaluate whether Radlett Timber should choose the automated cutting line rather than upgrading its existing line.
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3
12 marks
Case Study
Nayland Water
Nayland Water designs and installs water treatment systems in country E. It is appraising a new plant costing $2.4 million with an expected life of ten years.
The appraisal produces:
a net present value of $410 000 at a discount rate of 8%
a payback period of 6 years 2 months
The forecast assumes revenue grows 5% a year for ten years. Nayland's revenue has grown at 5% a year for the last three years.
Two of Nayland's four largest contracts are with the government and are re-tendered every three years.
Nayland's bank has indicated that borrowing costs will rise. At a discount rate of 11%, the net present value becomes negative.
The treatment technology used in the plant is expected to be superseded within about eight years.
Evaluate whether Nayland Water can rely on its investment appraisal when deciding to proceed with the new plant.
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