Lesson 3.7.8

3.7.8 Analysing strategic options: investment appraisal Quiz: AQA Business, Unit 7

20 questions

Written by Revision Ninja · Last reviewed 11 October 2026

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Lesson 3.7.8, Analysing strategic options: investment appraisal: 20 multiple choice questions for the AQA Business (7132), Unit 7: Analysing the strategic position of a business, written with Revision Ninja.

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The 20 questions

  1. What does the payback method measure?

    • The rate of interest at which the project's net present value becomes exactly zero
    • The average profit earned each year as a percentage of the total investment
    • The time taken for an investment's cash flows to recover the initial outlay
    • The present value of all future cash flows after the initial outlay has been deducted

  2. What is the average rate of return (ARR) method?

    • Average annual profit expressed as a percentage of the initial investment
    • The total cash flow over the life of a project divided by the number of years in its life
    • The number of years taken for cumulative cash flows to equal the initial investment outlay
    • The discount rate at which the sum of discounted cash flows equals the initial investment

  3. What does net present value (NPV) measure?

    • The total undiscounted cash flow from a project, after adding back the depreciation charged each year
    • The sum of discounted future cash flows minus the initial outlay, showing value added in today's money
    • The average accounting profit earned by a project over its life, expressed as a percentage return
    • The number of years needed for the project to break even on its operating costs in the period

  4. A project costs 50,000 pounds and returns 20,000 pounds a year in cash flow. What is the payback period?

    • 2.5 years
    • 0.4 years
    • 2 years
    • 3 years

  5. A project costs 120,000 pounds and returns 30,000 pounds a year. What is the payback period?

    • 0.25 years
    • 12 years
    • 3 years
    • 4 years

  6. A project costs 60,000 pounds and earns an average annual profit of 12,000 pounds. What is the ARR?

    • 5%
    • 12%
    • 20%
    • 72%

  7. A project costs 200,000 pounds and makes total profit of 80,000 pounds over four years. What is the ARR?

    • 2.5%
    • 10%
    • 40%
    • 25%

  8. A project costs 100,000 pounds and produces cash of 60,000 pounds at the end of each of two years. Using a 10% discount rate, what is the NPV to the nearest 10 pounds?

    • About 40,000 pounds
    • About minus 4,130 pounds
    • About 4,130 pounds
    • About 104,130 pounds

  9. A project has a negative NPV at the company's required discount rate. What is the appropriate decision on purely financial grounds?

    • Accept the project, because a negative NPV means the cash flows are always greater than the outlay
    • Delay the decision indefinitely, because NPV is irrelevant when a project has any negative value
    • Accept the project, because a negative NPV means the project will pay back quickly over time
    • Reject the project, because it does not earn the required return on the capital invested

  10. What is the main limitation of the payback method?

    • It requires the business to calculate depreciation, which makes it impossible to use in practice
    • It always gives a negative answer for any project that is financially sound and worth pursuing
    • It ignores cash flows that arrive after the payback point and does not consider the time value of money
    • It can only be used for projects that last more than fifty years in the business's plans

  11. What is the main limitation of ARR as an appraisal method?

    • It requires the investment to be paid back in full within the first two years of the project
    • It ignores the time value of money and relies on accounting profit rather than cash flow
    • It only uses cash flows that are discounted at a rate set by the central bank each quarter
    • It can only be calculated for projects that have a fixed life of exactly one year each time

  12. Which factor is most likely to increase the discount rate used in an NPV appraisal?

    • Higher risk and uncertainty about the project's future cash flows
    • A decision to pay all of the project's costs in cash rather than through borrowing
    • A reduction in the number of years over which the project is expected to generate cash flows
    • A fall in the level of risk because the market has become more stable and predictable

  13. A project costs 90,000 pounds and returns 30,000 pounds, 40,000 pounds and 50,000 pounds in years one, two and three. What is the payback period?

    • 2.4 years
    • 1.8 years
    • 2.0 years
    • 3.0 years

  14. A business chooses between two projects. Project A has a higher NPV but a longer payback period than Project B. What is the best evaluation of the choice?

    • The two methods give the same answer in every case, so the business can ignore the difference between them
    • Project B must be chosen, because payback is always a better guide to value than NPV in any case
    • Project A must be rejected, because a longer payback period always means the project cannot be funded
    • Project A adds more value in today's terms, but the longer payback means more exposure to risk, so the decision should weigh both

  15. Which non-financial factor might influence an investment decision?

    • The exact rate of depreciation that will be charged to the income statement in each future year
    • The effect of the investment on the firm's brand image and its environmental impact
    • The number of years that a project will be shown on the company's balance sheet after completion
    • The size of the bonus that the chief executive will receive once the project has been completed

  16. Why is uncertainty important when appraising an investment?

    • Uncertainty has no effect on investment because all projects return exactly what has been forecast each year
    • Forecast cash flows may prove wrong, so sensitivity analysis or a risk-adjusted discount rate can help managers judge the outcome
    • Uncertainty means that cash flows are always certain, so no adjustment for risk is ever needed by managers
    • Uncertainty only matters for government projects, and private firms can ignore it when making decisions

  17. A firm finds that NPV is positive but very sensitive to a small fall in sales. What is the most sensible response?

    • Approve the project immediately, because a positive NPV means that the project can never fail in practice
    • Test the project's sensitivity further and consider the risk before committing, as small changes could make NPV negative
    • Reject the project without further analysis, because any sensitivity to sales makes a project invalid
    • Ignore the sensitivity because NPV is always unaffected by changes in sales in any real-world setting

  18. Which is an advantage of NPV over ARR as an investment appraisal method?

    • It is simpler to calculate because it uses only accounting profit and needs no discounting at all
    • It ignores the risk of a project, so managers do not need to make any judgement about uncertainty
    • It accounts for the time value of money by discounting future cash flows to present value
    • It only uses figures from the balance sheet, so it is always more accurate than cash flow forecasts

  19. Evaluate the claim that NPV always gives the best decision for an investment.

    • NPV is only useful for public sector bodies, so private firms should avoid it in all their investment decisions
    • NPV is a strong guide, but it depends on the accuracy of forecasts and the discount rate, so it should be used with other factors
    • NPV always gives the best decision because it requires no forecasts and uses only certain historical data for every project
    • NPV is irrelevant to decision making because managers should base every investment on the payback period alone

  20. Which investment criteria is most likely to be used by a business that is short of cash?

    • ARR calculated on accounting profit, because it ignores the timing of cash flows in the period
    • NPV with a very low discount rate, because it always favours projects with the longest life in every case
    • Payback period, because it shows how quickly the outlay is recovered from cash flows
    • Net present value of the most distant cash flows, because they give the highest total value of all

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