ACCA AS Financial Management

Question 1

Net present value (NPV) is calculated as:

Accepted Answer

The sum of present values of future cash flows minus the initial investment

Answer

NPV = Sum of discounted future cash inflows − Initial investment. A positive NPV indicates the investment earns more than the cost of capital, adding value to the firm.

Question 2

The internal rate of return (IRR) is:

Accepted Answer

The discount rate at which NPV equals zero

Answer

IRR is the discount rate that makes the NPV of a project exactly zero. If IRR > cost of capital, the project is acceptable; if IRR < cost of capital, reject.

Question 3

Which of the following is a limitation of the payback period as an investment appraisal method?

Accepted Answer

It ignores cash flows arising after the payback period

Answer

Payback ignores all cash flows occurring after the payback period is reached, meaning it can favour short-term projects over more profitable long-term ones.

Question 4

The weighted average cost of capital (WACC) represents:

Accepted Answer

The average after-tax cost of all long-term financing, weighted by market values

Answer

WACC is the blended cost of all sources of capital (equity and debt), each weighted by its proportion of total capital at market value. It is used as the discount rate for investment appraisal.

Question 5

Working capital management involves balancing:

Accepted Answer

The levels of current assets and current liabilities to maintain liquidity and profitability

Answer

Working capital management aims to optimise current assets (inventory, receivables, cash) and current liabilities (payables, overdraft) to maintain sufficient liquidity while maximising profitability.

ACCA Applied Skills Practice Test

ACCA Applied Skills Practice Test

ACCA AS Financial Management