Investment Appraisal

Question 1

What is the formula for Net Present Value (NPV)?

Answer 1

NPV = Σ CFₜ / (1 + r)ᵗ; accept if NPV > 0

Examples in Week 7–10 pack

Question 2

What is the Internal Rate of Return (IRR)?

Answer 2

Discount rate that sets NPV = 0

Question 3

What is the Payback period?

Answer 3

Time until cumulative cash flows = initial outlay

Question 4

What is the formula for Accounting Rate of Return (ARR)?

Answer 4

ARR = Avg annual profit ÷ Avg investment

Question 6

What is a Defined Contribution (DC) plan?

Answer 6

Employer’s obligation limited to agreed contributions; investment risk on employee

In a DC plan, the retirement benefits depend on the contributions made and the performance of the investments chosen by the employee.

Question 7

What is a Defined Benefit (DB) plan?

Answer 7

Employer promises a specified benefit; bears actuarial & investment risk

In a DB plan, the retirement benefit is predetermined, providing more certainty for the employee regarding their future retirement income.