Chapter 3 - Traditional methods of investment appraisal

The following data will be use for questions 1-3 in this chapter.

Nistleroy Vans Ltd is considering investing in a new van costing £20,000. It is expected that it will have a life of 4 years and be worth £2,000 at the end of this time. It is expected that the net cash flows from the investment will be:

Year £000s
1 6
2 8
3 9
4 7

Assuming no additional working capital, the payback period for the van is:
1. 2 years
2. 3 years
3. 2 years and 8 months
4. 3 years and 2 months
Assuming no additional working capital the return on initial capital employed for the van is:
1. 50%
2. 27.8%
3. 15.0%
4. 12.5%
Assuming no additional working capital, the return on average capital employed is:
1. 50%
2. 27.3%
3. 15.4%
4. 12.5%
Which of these is NOT seen as being an advantage of using payback?
1. It is relatively easy to work out
2. It helps in situations where the company has limited funds for investment
3. It provides the most accurate indication as to which option to choose
4. It limits the amount of forecasting required
Which of these is an advantage of ROCE?
1. It is consistent with a method commonly used to assess management performance
2. It helps in situations where the company has limited funds for investment
3. It limits the amount of forecasting required
4. It provides the most accurate indication as to which option to choose
The primary objective of investment decisions should be
1. The generation of additional cash flows
2. Expansion of the business
3. Limiting risks
4. Ensuring that managers are logical
Which of these statements is true?
1. As decision making has become more scientific, the use of payback has become uncommon
2. Accounting rate of return is extremely popular and becoming more so
3. Companies tend to use a number of criteria in making investment decisions
4. Using better criteria guarantees that the correct decision will be made
Working capital requirements relating to projects are
1. Always irrelevant
2. Relevant for most decision methods but probably not payback
3. Relevant for all decision methods
4. Only relevant if they are very large

Year	£000s
1	6
2	8
3	9
4	7

Chapter 3 - Traditional methods of investment appraisal

Quiz