Identify which one of the following methods of investment appraisal uses annual profits (losses) rather than annual cash flows when evaluating investment opportunities?

a.Accounting rate of return.

b.Internal rate of return.

c.Net present value.

d.Payback period.

Devril plc is considering investing in a project that has an initial cash outlay followed by a series of net cash inflows. The business applied the NPV and IRR methods to evaluate the project but, after the evaluation had been undertaken, it was found that the correct cost of capital figure (i.e., required rate of interest) was lower than that used in the evaluation.

Identify what would be the effect of correcting for this error on the NPV and IRR figures?

a.NPV would decrease and IRR would not change.

b.NPV would decrease and IRR would decrease.

c.NPV would increase and IRR would increase.

d.NPV would increase and IRR would not change.

Identify which one of the following statements is FALSE in relation to the advantages and disadvantages of using the 'payback period' to evaluate capital investment decisions?

a.An advantage of using the payback period method is that it is easy to understand and tocalculate.

b.An advantage of using the payback period method is that it considers risk in the sense that we will reduce the required payback period for those projects deemed to be relatively risky.

c.A disadvantage of using the payback period method is that it does not consider the time value of money.

d.An advantage of using the payback period method is that it does not consider the cash flows that occur after the payback period has been reached.