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WalesBusinessQuick questions
Business Analysis and Strategy (A2 Unit 3)
Quick questions on Investment appraisal (payback, ARR, NPV) - WJEC A-Level Business
4short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.
What is payback period?Show answer
The payback period is the time taken for an investment's net cash inflows to repay its initial cost. You add the cash inflows cumulatively until they equal the cost. Payback is simple, quick and useful for liquidity (how soon the money comes back), which matters to firms short of cash. Its weaknesses are that it ignores cash flows after payback (and so total profitability) and the time value of money.
What is net present value (NPV)?Show answer
Net present value (NPV) recognises that money received in the future is worth less than money today (the time value of money). Each future cash flow is multiplied by a discount factor (which falls the further into the future the cash flow is, based on a chosen discount rate) to find its present value. The present values of all the inflows are added, and the initial cost is subtracted:
What is q1?Show answer
Define the term payback period. [2 marks]
What is q2?Show answer
A project costs £50,000 and earns total profit of £30,000 over five years. Calculate its average rate of return (ARR). [3 marks]
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