AQA A-Level Accounting: Capital investment appraisal (7127) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

This set covers section 3.13, Capital investment appraisal, of the AQA A-level Accounting (7127) specification, version 1.1 (October 2026), for A-level exams from June 2019 onwards. The course is untiered; this section is assessed on Paper 2. All businesses and figures are invented. Round present values to the nearest £ and payback periods to the nearest month.

See the study guide and revision notes. Course hub: AQA A-level Accounting; checklist: printable checklist; quick check: diagnostics.

Questions

1. Hollins Ltd is appraising a new machine. Which one of the following is a relevant cash flow for the appraisal? [1]

A. Annual depreciation on the machine B. A feasibility study paid for last month C. The cash expected from selling the machine at the end of its life D. A share of the existing factory rent charged to the machine’s department

2. What is the discount factor for a cash flow at the end of year 3 when the cost of capital is 9%? [1]

A. 0.270 B. 0.772 C. 0.842 D. 0.917

3. State the meaning of:

(a) discount factor [1] (b) cost of capital [1]

4. Marsh Couriers plans to buy a van for £84 000. It will generate net cash inflows of £24 000 a year. Calculate the payback period in years and months. [2]

5. Linden Roasters is considering a coffee roaster costing £75 000. It will be used for 3 years and then sold for £15 000. Depreciation is straight-line. Forecast profits from the roaster, after charging depreciation, are: year 1 £8 000; year 2 £14 000; year 3 £11 000.

Calculate the net cash flow for each of years 1 to 3. [3]

6. Pelham Tyres is considering a project with an initial outlay of £150 000. Net cash inflows are forecast as: year 1 £35 000; year 2 £45 000; year 3 £50 000; year 4 £48 000; year 5 £30 000.

Calculate the payback period. [4]

7. Brook Dental Practice plans to buy imaging equipment for £200 000. Net cash inflows will be £60 000 a year for 4 years, and the equipment will then be sold for £25 000. The cost of capital is 11%. Discount factors: year 1 0.901; year 2 0.812; year 3 0.731; year 4 0.659.

(a) Calculate the net present value of the project. [5] (b) State, with a reason, whether the project should go ahead on financial grounds. [1]

8. Explain one benefit and one limitation of the payback method of capital investment appraisal. [4]

9.

(a) Explain one reason why net present value is often preferred to payback. [2] (b) Explain one limitation of the net present value method. [2]

10. Ravensworth Bakery can afford one of two ovens, X or Y. Each costs £140 000. The cost of capital is 9%. Discount factors: year 1 0.917; year 2 0.842; year 3 0.772; year 4 0.708; year 5 0.650.

Year	Oven X net cash inflow (£)	Oven Y net cash inflow (£)
1	60 000	20 000
2	50 000	30 000
3	36 000	40 000
4	20 000	60 000
5	10 000	70 000

Oven Y uses less energy. Its maker is a new company with no service network in the bakery’s area.

(a) Calculate the payback period for each oven. [4] (b) Calculate the net present value of each oven. [4] (c) Evaluate which oven the bakery should buy. Use your answers to (a) and (b) and other relevant factors. [4]

11. Holloway Engineering is considering an automated cutter. The finance director has provided:

• cost of the cutter, paid now: £96 000;
• a consultant’s report on the cutter, already paid: £4 000;
• useful life 3 years, residual value at the end of year 3: £12 000;
• annual savings in labour costs: £38 000; extra annual maintenance: £6 000;
• annual depreciation of £28 000, charged in the profit forecast;
• £3 000 a year of existing factory rent, apportioned to the cutter in the profit forecast.

The cost of capital is 10%. Discount factors: year 1 0.909; year 2 0.826; year 3 0.751.

(a) Calculate the annual net cash flow, explaining how you have treated the consultant’s report, the depreciation and the rent. [4] (b) Calculate the net present value of the cutter. [4] (c) Recommend whether the business should buy the cutter, including one non-financial factor. [2]

Answers

1. C: the residual value is a future cash inflow caused by the project [1]. Examiner insight: A and D are classic distractors; depreciation is non-cash and apportioned rent is paid anyway.

2. 1 ÷ 1.09³ = 0.772, so B [1]. Examiner insight: 0.917 and 0.842 are the year-1 and year-2 factors; check you used the right power of n.

3. (a) The number a future cash flow is multiplied by to give its present value, based on the cost of capital and the year [1]. (b) The rate of return a business must pay to the providers of its finance; the minimum return a project must earn [1]. Examiner insight: “Interest rate” alone is too vague for (b); link it to the return required on finance.

4. 84 000 ÷ 24 000 = 3.5 years [1]; 0.5 × 12 = 6 months, so 3 years 6 months [1]. Examiner insight: “3.5 years” alone does not answer “in years and months”, so the final mark is at risk.

5. Depreciation = (75 000 − 15 000) ÷ 3 = £20 000 a year [1]. Add back: year 1 £28 000; year 2 £34 000 [1]; year 3 31 000 + 15 000 residual value = £46 000 [1]. Examiner insight: Depreciation is added back because it is non-cash; leaving the residual value out of year 3 loses a mark.

6. Cumulative: year 1 (115 000); year 2 (70 000) [1]; year 3 (20 000), turning positive in year 4 [1]. (20 000 ÷ 48 000) × 12 = 5 months [1]. Payback = 3 years 5 months [1]. Examiner insight: Show the cumulative column; with a wrong final answer, visible working is the only route to method credit.

7. (a) Year 4 cash flow = 60 000 + 25 000 = £85 000 [1]. Present values: 54 060; 48 720; 43 860 [1]; 85 000 × 0.659 = 56 015 [1]. Total = £202 655 [1]. NPV = 202 655 − 200 000 = £2 655 [1]. (b) Go ahead: the NPV is positive, so the project earns more than the 11% cost of capital, though the margin is small [1]. Examiner insight: The decision must follow from your own NPV figure; a positive NPV with “reject” and no reason gains nothing.

8. Benefit: payback is simple and quick to calculate and understand [1], so managers who are not accountants can use it to compare projects [1]. Limitation: it ignores cash flows after the payback point [1], so a project with large later inflows may be rejected even though it adds more value [1]. Examiner insight: In this answer each pair of marks is a point plus its development, so a bare list of points earns only the first mark of each pair.

9. (a) NPV allows for the time value of money [1]: later cash flows are discounted because cash received sooner can be reinvested, so the result reflects what the project is worth today [1]. (b) The answer depends on the cost of capital [1], which is hard to estimate; a small change in the rate can turn a positive NPV negative [1]. Examiner insight: “It is more accurate” earns nothing on its own; say why, such as discounting or using all the cash flows.

10. (a) X cumulative: (80 000), (30 000), turning positive in year 3 [1]; 2 years + (30 000 ÷ 36 000) × 12 = 2 years 10 months [1]. Y cumulative: (120 000), (90 000), (50 000), turning positive in year 4 [1]; 3 years + (50 000 ÷ 60 000) × 12 = 3 years 10 months [1]. (b) X present values: 55 020 + 42 100 + 27 792 + 14 160 + 6 500 = 145 572 [1]; NPV = £5 572 [1]. Y present values: 18 340 + 25 260 + 30 880 + 42 480 + 45 500 = 162 460 [1]; NPV = £22 460 [1]. (c) Both NPVs are positive, but Y adds £16 888 more value [1]. X pays back a year sooner; Y depends on large inflows in years 4 and 5, which are the least certain forecasts [1]. Y’s lower energy use helps costs and reputation, but having no local service network risks long breakdowns [1]. Recommendation: buy Y if the bakery can secure a service contract, as its NPV is far higher; otherwise X is the safer choice [1]. Examiner insight: The final mark needs a decision justified by the figures; “it depends” with no choice does not earn it.

11. (a) Net cash flow = 38 000 − 6 000 = £32 000 a year [1]. The consultant’s report is excluded as a sunk cost [1]. Depreciation is excluded because it is non-cash [1]. The rent is excluded because it is paid whether or not the cutter is bought [1]. (b) Years 1 and 2: 32 000 × 0.909 = 29 088 and 32 000 × 0.826 = 26 432 [1]. Year 3 cash flow = 32 000

• 12 000 = 44 000 [1]; 44 000 × 0.751 = 33 044, total present value 88 564 [1]. NPV = 88 564 − 96 000 = −£7 436 [1]. (c) Non-financial factor: the cutter may improve accuracy and safety by removing manual cutting [1]. Recommendation: do not buy on the current figures, as the NPV is negative, unless the gains in quality or safety are judged to outweigh a £7 436 shortfall [1]. Examiner insight: Each exclusion in (a) needs its reason; naming the item without saying why it is left out scores nothing.

Where marks are usually lost

• Adding depreciation as a cash outflow instead of excluding it.
• Including sunk costs such as reports or surveys already paid for.
• Including apportioned rent or overheads that do not change.
• Leaving the residual value out of NPV or putting it in the wrong year.
• Converting a decimal of a year to months wrongly, or using the wrong year’s inflow as divisor.
• Discounting the year-0 outlay or forgetting to deduct it.
• Giving an NPV without a sign or a decision.
• Evaluations with no non-financial factor or no final recommendation.

Next steps

• Revision notes
• Study guide
• Marginal costing practice for more relevant-cost decisions
• AQA A-level Accounting hub
• Printable checklist
• All free 10-minute diagnostics
• Book a free trial class

Official syllabus

AQA A-level Accounting (7127) specification, version 1.1, October 2026, for A-level exams June 2019 onwards (AQA). Section 3.13 Capital investment appraisal.