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Investment Analysis Flashcards

7 cards from real CPP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Investment Analysis flashcards as text

  1. A new automated purchasing system costs $50,000 and saves $12,500 per year. What is its simple payback period?

    Answer: 4 years

    Payback = $50,000 / $12,500 = 4 years.

  2. What is a key weakness of the simple payback period method?

    Answer: It ignores cash flows after the payback point and the time value of money

    Simple payback ignores both discounting and any returns received after the investment is recovered.

  3. How does the discounted payback period differ from the simple payback period?

    Answer: It measures recovery time using present values of cash flows

    Discounted payback discounts each cash flow before cumulating, so it accounts for the time value of money.

  4. A supplier consolidation initiative cost $120,000 and generated a net gain of $30,000. What is the return on investment (ROI)?

    Answer: 25%

    ROI = net gain / cost = $30,000 / $120,000 = 25%.

  5. When using the profitability index (PI), a project is considered acceptable when its PI is:

    Answer: Greater than 1.0

    A PI above 1.0 means the present value of inflows exceeds the initial investment, implying a positive NPV.

  6. A project requires a $200,000 initial investment and its future cash inflows have a present value of $220,000. What is its profitability index?

    Answer: 1.10

    PI = $220,000 / $200,000 = 1.10.

  7. Multiple internal rates of return are most likely to occur when a project's cash flows:

    Answer: Change sign more than once over the project's life

    Non-conventional cash flows, such as a large decommissioning cost at the end, can produce more than one IRR.