Lesson 3.3.2

3.3.2 Investment appraisal Quiz: Pearson Edexcel Business, Unit 3

20 questions

Written by Revision Ninja · Last reviewed 11 October 2026

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Lesson 3.3.2, Investment appraisal: 20 multiple choice questions for the Pearson Edexcel Business (9BS0), Unit 3: Business decisions and strategy, written with Revision Ninja.

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The 20 questions

  1. What does the payback period of an investment project measure?

    • Average percentage return
    • Total profit earned
    • Cost recovery time
    • Discounted cash flow

  2. How is the Average Rate of Return (ARR) expressed?

    • In pounds
    • In years
    • As a decimal
    • As a percentage

  3. What crucial economic factor does Net Present Value account for that simple payback ignores?

    • Time value of money
    • Total project duration
    • Initial capital outlay
    • Accounting rate of return

  4. What does a positive Net Present Value (NPV) indicate about a project?

    • Breaks even exactly
    • Increases capital costs
    • Reduces cash flow
    • Adds financial value

  5. What is a key limitation of the simple payback period method?

    • Ignores post-payback cash
    • Ignores initial costs
    • Overestimates annual profit
    • Requires complex maths

  6. What is a major limitation of the Average Rate of Return (ARR)?

    • Excludes setup costs
    • Ignores cash timing
    • Requires discount tables
    • Ignores overall profit

  7. What core financial principle underpins discounted cash flow techniques in investment appraisal?

    • Gross profit margin
    • Historic cost accounting
    • Time value of money
    • Straight line depreciation

  8. A project costs 100,000 pounds and is expected to produce cash flows of 30,000, 40,000 and 50,000 pounds in years one to three. What is the simple payback period?

    • 2.6 years
    • 2 years
    • 3 years
    • 2.25 years

  9. A project costs 150,000 pounds and produces 50,000 pounds of cash flow each year. What is its simple payback period?

    • 2.5 years
    • 3 years
    • 2 years
    • 4 years

  10. A project requires an investment of 200,000 pounds and earns average annual profit of 30,000 pounds. What is its ARR?

    • 15%
    • 30%
    • 6.7%
    • 150%

  11. A project costs 100,000 pounds. Year-one cash flow is 121,000 pounds and the discount rate is 10%. What is the NPV?

    • 0 pounds
    • -10,000 pounds
    • 21,000 pounds
    • 10,000 pounds

  12. A project has a payback period of 3.5 years, exceeding a firm's 3-year target. What should the firm do?

    • Calculate net profit
    • Accept the project
    • Reject the project
    • Increase discount rate

  13. Project A has an NPV of £20,000 and Project B has an NPV of £5,000. Which project is preferred?

    • Project B
    • Project A
    • Neither project
    • Both equally

  14. Why are future cash flows discounted when calculating Net Present Value?

    • To increase revenue
    • To eliminate risk
    • To calculate profit
    • Reflect opportunity cost

  15. A project costs 80,000 pounds and returns 25,000 pounds per year for four years. What is its simple payback period?

    • 3 years
    • 4 years
    • 3.2 years
    • 3.5 years

  16. A project costs 500,000 pounds and earns a total profit of 375,000 pounds over five years. What is the ARR?

    • 15%
    • 75%
    • 3.75%
    • 18.75%

  17. Which project characteristic might simple payback unfairly reject in favour of quick returns?

    • Low initial outlay
    • Short operating lifespan
    • Guaranteed early profits
    • High late cash flows

  18. What happens to a project's Net Present Value if the discount rate is increased?

    • Payback period shortens
    • NPV increases
    • NPV remains unchanged
    • NPV decreases

  19. Which investment appraisal method best suits a business with severe liquidity problems?

    • Average Rate Return
    • Simple payback
    • Net Present Value
    • Decision tree

  20. A project has a high positive ARR but a negative NPV. What is the main cause?

    • Zero capital cost
    • Short payback period
    • Late cash flows
    • High sales volume

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