Lesson 5.6.1

5.6.1 Investment appraisal Quiz: OCR Business, Unit 5

20 questions

Written by Revision Ninja · Last reviewed 11 October 2026

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Lesson 5.6.1, Investment appraisal: 20 multiple choice questions for the OCR Business (H431), Unit 5: Accounting and finance, written with Revision Ninja.

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The 20 questions

  1. What does the payback period method of investment appraisal calculate?

    • Time to recover
    • Total net profit
    • Discounted cash flow
    • Average annual profit

  2. An investment costs £100,000 and generates £25,000 net cash flow annually. What is payback?

    • 3 years
    • 4 years
    • 5 years
    • 2.5 years

  3. How is Average Rate of Return (ARR) expressed when evaluating an investment proposal?

    • As a percentage
    • In years
    • As a ratio
    • In pounds

  4. A £50,000 project yields total profit of £20,000 over 4 years. What is the ARR?

    • 25%
    • 10%
    • 8%
    • 40%

  5. Which investment appraisal technique explicitly accounts for the time value of money?

    • Net Present Value
    • Break-even analysis
    • Average rate return
    • Payback period

  6. Why does a pound received in five years have less value than a pound today?

    • Higher tax
    • Opportunity cost
    • Lower demand
    • Increased output

  7. A project has a Net Present Value of minus £15,000. What decision should be made?

    • Accept project
    • Reject project
    • Delay 1 year
    • Increase outlay

  8. Which of the following is a qualitative factor influencing an investment appraisal decision?

    • Average profit
    • Payback period
    • Discounted cash flow
    • Environmental impact

  9. What type of data do payback period and ARR rely upon exclusively?

    • Qualitative data
    • Anecdotal data
    • Subjective data
    • Quantitative data

  10. Why might a business with severe liquidity problems prefer the payback period method?

    • Focuses on cash
    • Discounts future value
    • Measures total profit
    • Ignores cash flow

  11. What is a major limitation of using the payback period method alone?

    • Ignores later cash
    • Ignores cash flows
    • Expressed as percentage
    • Too complex

  12. What is the first step in calculating the Average Rate of Return?

    • Subtract residual value
    • Multiply by discount
    • Divide by outlay
    • Calculate total profit

  13. A project has present value inflows of £120,000 and cost £100,000. What is the NPV?

    • £1.20
    • -£20,000
    • £220,000
    • £20,000

  14. If interest rates rise, what happens to the discount factors used in NPV calculations?

    • They increase
    • They decrease
    • They reach zero
    • They remain constant

  15. Two projects have positive NPVs. Which project should a profit-maximising business choose?

    • Lowest outlay
    • Highest positive NPV
    • Lowest ARR
    • Shortest payback

  16. Replacing workers with robots improves ARR but harms staff morale. What issue is this?

    • Qualitative conflict
    • Favourable variance
    • Negative cash flow
    • Under-capacity

  17. What is the primary purpose of carrying out formal investment appraisal?

    • Set monthly budgets
    • Calculate tax liabilities
    • Manage working capital
    • Evaluate capital projects

  18. What technique tests how an investment outcome changes when key variables vary?

    • Ratio analysis
    • Variance analysis
    • Sensitivity analysis
    • Break-even analysis

  19. What figure is commonly used as the discount rate when calculating NPV?

    • Profit margin
    • Current ratio
    • Cost of capital
    • Inflation rate

  20. What is a key drawback of the Average Rate of Return method?

    • Ignores total profit
    • Expressed in pounds
    • Focuses on cash
    • Ignores cash timing

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