Finance for Non-Finance Managers Investment Decision Making 1

Question 1

What is the payback period?

Accepted Answer

The time required for cumulative cash inflows to recover the initial investment

Answer

The time it takes for an investment to generate its first profit

Answer

The interest rate that makes NPV equal to zero

Answer

The annual return on a project expressed as a percentage

Question 2

A project costs $100,000 and generates $25,000 per year. What is its payback period?

Accepted Answer

4 years

Answer

2 years

Answer

5 years

Answer

10 years

Question 3

What is the main weakness of the payback period method?

Accepted Answer

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

Answer

It is too complex to calculate

Answer

It requires knowledge of the discount rate

Answer

It cannot be applied to capital projects

Question 4

Net Present Value (NPV) is positive when:

Accepted Answer

The present value of cash inflows exceeds the initial investment

Answer

The project's cost exceeds its benefits

Answer

The payback period is less than one year

Answer

The IRR is lower than the discount rate

Question 5

Time value of money is based on the principle that:

Accepted Answer

A dollar received today is worth more than a dollar received in the future

Answer

Money grows with inflation automatically

Answer

Investments always generate positive returns

Answer

Cash flows far in the future are more valuable

Question 6

Which investment appraisal method accounts for the time value of money?

Accepted Answer

Net present value (NPV)

Answer

Simple payback period

Answer

Accounting rate of return (ARR)

Answer

Gross profit margin