A Level Accounting: Investment appraisal (Cambridge 9706) – 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.

These questions follow the Cambridge International AS & A Level Accounting 9706 syllabus for 2026, 2027 and 2028, section 4.4 Investment appraisal (A Level content). All businesses and figures are invented and all amounts are in dollars. Learn the methods in the study guide or revision notes. See the course hub, the printable checklist and the free diagnostics. Where a question gives discount factors, use them.

Questions

1. Explain what is meant by the time value of money, and why it matters when a business appraises an investment. [3]

2. Explain two reasons why the accounting profit from a project is different from the net cash flow it generates. [4]

3. Corrimore Joinery is considering a machine costing 60,000, paid at the start. It has a 4-year life, no residual value and is depreciated on the straight line. Forecast profits after depreciation are 8,000, 11,000, 14,000 and 9,000 in years 1 to 4.

(a) Calculate the net cash flow for each of years 0 to 4. [3] (b) Calculate the payback period in years, and to the nearest month. [3]

4. Ullesby Laundry plans to buy a pressing line for 84,000 with a 6-year life and no residual value. Net cash inflows are 22,000, 26,000, 30,000, 28,000, 24,000 and 20,000 in years 1 to 6. The target accounting rate of return is 25%.

(a) Calculate the ARR, using average profit divided by average investment, to one decimal place. [5] (b) State the decision on ARR, and give one limitation of ARR. [2]

5. Gillbeck Cafe is considering new ovens costing 50,000. Net cash inflows are 18,000, 20,000, 22,000 and 12,000 in years 1 to 4. The cost of capital is 8%. Discount factors at 8% are: year 1 0.9259, year 2 0.8573, year 3 0.7938, year 4 0.7350.

(a) Calculate the net present value (NPV). Round each present value to the nearest dollar. [4] (b) Advise whether the project should go ahead on this evidence, with a reason. [2]

6. Orrington Plastics is considering a mould costing 90,000. Net cash inflows are 35,000, 40,000, 38,000 and 20,000 in years 1 to 4. The cost of capital is 14%. Discount factors:

Year	1	2	3	4
16%	0.8621	0.7432	0.6407	0.5523
20%	0.8333	0.6944	0.5787	0.4823

(a) Calculate the NPV at 16% and at 20%. Round each present value to the nearest dollar. [4] (b) Estimate the internal rate of return (IRR) to one decimal place. [2] (c) State the decision, with a reason. [2]

7. Explain why many accountants regard NPV as a better guide to an investment decision than payback. [6]

8. Rushbourne Quarry is considering a crusher costing 150,000. At a cost of capital of 10% the NPV is 22,000 and payback is 3.5 years, against a target of 4 years. The crusher would make 6 of the 40 employees redundant, cut lorry journeys through the nearby village by a third and reduce dust, but add evening noise.

(a) Identify two non-financial factors in the information. [2] (b) Recommend whether the quarry should buy the crusher, using the financial and non-financial information. [6]

9. Lindisford Textiles must choose between two machines. Each costs 70,000, and only one can be bought. The cost of capital is 9%. Discount factors at 9%: year 1 0.9174, year 2 0.8417, year 3 0.7722, year 4 0.7084.

Year	Machine A inflow	Machine B inflow
1	30,000	10,000
2	35,000	25,000
3	25,000	40,000
4	10,000	45,000

(a) Calculate the payback period for each machine in years, to two decimal places. [4] (b) Calculate the NPV of each machine. Round each present value to the nearest dollar. [4] (c) Recommend which machine to buy, with reasons. [4]

10. Sablemere Marine can buy a hull press for 96,000, paid at the start. Its life is 4 years, with no residual value and straight line depreciation. Forecast profits are 9,000, 14,000, 17,000 and 12,000 in years 1 to 4. These are after depreciation and after a charge of 4,000 a year for a share of existing head office costs. The cost of capital is 10%. Discount factors at 10%: year 1 0.9091, year 2 0.8264, year 3 0.7513, year 4 0.6830.

(a) Calculate the net cash inflow for each of years 1 to 4. [4] (b) Calculate the NPV, rounding each present value to the nearest dollar. [4] (c) Explain why the head office charge is added back. [2]

Answers

1. Cash received sooner is worth more than the same amount received later. [1] This is because cash now can be invested or used to cut borrowing, and later cash is less certain. [1] Future flows are therefore discounted to present values before they are compared with the outlay. [1] [3] Examiner insight: Answers tend to earn more when they link the idea to discounting.

2. Any two reasons, each explained. Depreciation is deducted in arriving at profit [1] but no cash leaves the business, so cash flow is higher. [1] The purchase of the asset is a large outflow at the start [1] but reaches profit only gradually through depreciation. [1] (Other valid reasons: apportioned costs that continue anyway; credit given to customers.) [4] Examiner insight: A reason tends to earn more when it says whether cash is higher or lower.

3. (a) Depreciation is 60,000 / 4 = 15,000 a year. [1] Net cash flows are profit plus depreciation: year 1 23,000, year 2 26,000, year 3 29,000, year 4 24,000. [1] Year 0 is an outflow of (60,000). [1] (b) Cumulative inflow is 23,000, 49,000 and 78,000. [1] After year 2, 11,000 is still needed out of 29,000 in year 3. [1] Payback = 2 + 11,000 / 29,000 = 2.38 years, which is about 2 years 5 months. [1] [6] Examiner insight: Show cumulative cash flow by year before calculating the fraction.

4. (a) Total inflows are 150,000. [1] Total profit = 150,000 − 84,000 = 66,000. [1] Average profit = 66,000 / 6 = 11,000. [1] Average investment = 84,000 / 2 = 42,000. [1] ARR = 11,000 / 42,000 × 100 = 26.2%. [1] (b) 26.2% is above the 25% target, so accept on ARR. [1] It uses profit rather than cash flow, so it ignores when the profits arise. [1] [7] Examiner insight: Answers tend to earn more when each stage (total profit, average profit, average investment) is shown separately.

5. (a) Year 1: 18,000 × 0.9259 = 16,666. [1] Year 2: 20,000 × 0.8573 = 17,146 and year 3: 22,000 × 0.7938 = 17,464. [1] Year 4: 12,000 × 0.7350 = 8,820. [1] Total present value 60,096 less 50,000 gives NPV of 10,096. [1] (b) The NPV is positive, so the project earns more than 8% and should go ahead. [1] The result depends on the forecasts, which should be checked. [1] [6] Examiner insight: The sign of the NPV only becomes a decision when it is tied to the cost of capital.

6. (a) At 16%: 30,174 + 29,728 + 24,347 + 11,046 = 95,295. [1] NPV = 5,295. [1] At 20%: 29,166 + 27,776 + 21,991 + 9,646 = 88,579. [1] NPV = (1,421). [1] (b) IRR = 16 + [5,295 / (5,295 + 1,421)] × (20 − 16). [1] IRR = 19.2% (approximately). [1] (c) The IRR of 19.2% is higher than the 14% cost of capital, so accept. [1] The figure is an estimate from interpolation. [1] [8] Examiner insight: Answers tend to read better when the interpolation formula is written out with the two NPVs and the rate gap.

7. Three points, each developed. NPV discounts cash flows, so it recognises the time value of money, [1] whereas payback treats a dollar in year 4 as equal to a dollar in year 1. [1] NPV uses every cash flow over the life of the project, [1] whereas payback ignores flows after the payback date, so a high-earning project can look worse than it is. [1] NPV gives the dollar value added, [1] whereas payback only measures speed of recovery. [1] [6] Examiner insight: Evaluation answers tend to score more when each comparison is two-sided and explains what is lost by using payback.

8. (a) Any two: redundancy of 6 employees; fewer lorry journeys through the village; reduced dust; more noise in the evening. [1] [1] (b) Financial: the NPV is positive at 22,000, [1] and payback of 3.5 years is within the 4-year target. [1] Non-financial: the redundancies hurt morale and local employment, [1] while reduced dust and fewer lorry journeys improve the quarry’s standing with the village. [1] Noise complaints could restrict opening hours and reduce the cash inflows. [1] Judgement: buy the crusher, provided the quarry manages the noise and treats the affected employees fairly. [1] [8] Examiner insight: Recommendations usually earn more when they weigh the non-financial factors against the figures and reach a clear decision.

9. (a) Machine A: cumulative inflow is 30,000 and 65,000, so 5,000 is needed in year 3. [1] Payback = 2 + 5,000 / 25,000 = 2.20 years. [1] Machine B: cumulative inflow is 10,000, 35,000 and 75,000, so 35,000 is needed in year 3. [1] Payback = 2 + 35,000 / 40,000 = 2.88 years. [1] (b) Machine A: 27,522 + 29,460 + 19,305 + 7,084 = 83,371. [1] NPV = 13,371. [1] Machine B: 9,174 + 21,042 + 30,888 + 31,878 = 92,982. [1] NPV = 22,982. [1] (c) A has the shorter payback, so it returns cash faster, [1] but B has the higher NPV by 9,611, so it adds more value in present terms. [1] Recommend B, because NPV recognises the time value of money and measures the value added. [1] A could be preferred if liquidity is tight. [1] [12] Examiner insight: When techniques disagree, answers tend to earn more when they say which technique is given the most weight and why.

10. (a) Depreciation = 96,000 / 4 = 24,000. [1] Add back depreciation and the 4,000 head office charge. [1] Net cash inflows are year 1 37,000, year 2 42,000, [1] year 3 45,000 and year 4 40,000. [1] (b) Present values: 33,637, 34,709, 33,808 and 27,320. [2] Total 129,474. [1] NPV = 129,474 − 96,000 = 33,474. [1] (c) The head office costs would be incurred whether or not the press is bought, [1] so they are not a cash flow caused by the project and must not reduce its cash inflows. [1] [10] Examiner insight: Show the conversion from profit to cash for each year, because the later discounting depends on those figures.

Where marks are usually lost

• Not adding depreciation back when turning profit into net cash flow.
• Discounting the year 0 outlay instead of leaving it undiscounted.
• Using profit instead of cash flow in payback, NPV or IRR.
• Stopping at a number with no decision.
• Interpolating the IRR from two NPVs of the same sign.
• Writing a one-sided recommendation with no non-financial factor.

Frequently asked questions

Are these Cambridge 9706 investment appraisal questions from past papers? No. They are twelve original questions with worked answers on section 4.4 of Cambridge 9706, written for revision. Use them alongside the official past papers.

What are the most common mistakes in investment appraisal questions? Common errors include not adding depreciation back when turning profit into cash flow, discounting the year 0 outlay, using profit instead of cash flow in payback, NPV or IRR, and interpolating the IRR from two NPVs of the same sign.

Should I give a decision after calculating NPV or payback? Yes. Stopping at a number with no decision is a common way to lose marks; tie the result to the target period or cost of capital and state whether to accept.

What should I do when appraisal techniques disagree? Say which technique you give the most weight and why, weigh the non-financial factors against the figures, and reach a clear decision.

Next steps

• Study guide and revision notes
• Course hub and checklist
• Take all free 10-minute diagnostics
• Book a free trial class at /trial/

Official syllabus

Cambridge International, AS & A Level Accounting 9706 syllabus for 2026, 2027 and 2028, section 4.4 Investment appraisal.