A Level Business: Investment appraisal and accounting strategy (Cambridge 9609) – 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 cover sections 10.3 Investment appraisal and 10.4 Finance and accounting strategy of the Cambridge International AS & A Level Business 9609 syllabus for examination in 2026, 2027 and 2028. Both are A Level content. All businesses are invented and money is in pounds. Use the study guide and revision notes. Earlier drills: Finance and Accounting (A Level) practice. Course links: the Cambridge A Level Business hub, the checklist and the free diagnostics.

Questions

1. Define investment appraisal and explain one reason why a business needs to use it. [3]

2. Orrin Hill Vineyard is considering a press costing £96,000. Expected net cash inflows are £24,000, £30,000, £30,000, £24,000 and £18,000 in Years 1 to 5. Calculate the payback period in years and months, assuming inflows arrive evenly through each year. [3]

3. Kelsingham Outdoor will buy a tent-making machine for £180,000. It is expected to last 5 years, with net cash inflows of £50,000, £60,000, £70,000, £60,000 and £40,000, and then be sold for £20,000. (a) Calculate the accounting rate of return (ARR). [4] (b) The company’s target ARR is 20%. State whether the machine meets it. [1]

4. Wilmerby Freight can buy a van for £60,000. Expected net cash inflows are £22,000, £24,000 and £26,000 in Years 1 to 3. Discount factors at 6% are 0.943, 0.890 and 0.840. At 10% they are 0.909, 0.826 and 0.751. (a) Calculate the net present value (NPV) at 6%. [3] (b) Calculate the NPV at 10% and state how the decision changes. [3]

5. Haverdene Bakery plans to replace its ovens. Explain two qualitative factors it should consider before deciding. [4]

6. Explain two limitations of using ratio analysis of published accounts to judge a business’s performance. [4]

7. Tressock Tools had profit for the year of £450,000, an annual dividend of £150,000 and 1.5 million shares in issue. Its market price per share is 360p. (a) Calculate dividend cover. [2] (b) Calculate dividend yield. [2] (c) Calculate the price/earnings ratio. [2]

8. Explain two ways in which the annual report of a company could be useful to a bank deciding whether to lend to it. [4]

9. Fordhampton Textiles has issued shares of £5.0m, reserves of £3.0m and non-current liabilities of £2.0m (interest 6% a year). Profit from operations is £1.2m, tax is 20% of profit before tax and the annual dividend is £0.40m. It needs £2.5m for new looms that will add £0.5m to profit from operations. It can issue shares or borrow at 8%. (a) Calculate gearing now and after each funding option. [3] (b) Calculate dividend cover after each option, assuming the dividend is unchanged. [3] (c) Analyse why ROCE is the same under both options. [2]

10. Tressock Tools (question 7) cuts its dividend to £75,000. (a) Calculate the new dividend cover and dividend yield. [3] (b) Explain one effect of the cut on its shareholders. [2]

11. Orrin Hill Vineyard must choose between a bottling plant (Project X) and a tasting room (Project Y), each costing £120,000 with no residual value. Its target ARR is 20% and it wants payback within 3 years. Results are below, with NPV at a 10% discount rate. Project X would need three new staff; Project Y depends on summer tourism.

	Project X	Project Y
Payback	3 years	2 years 4 months
ARR	23.3%	16.7%
NPV	£23,810	£18,240

Evaluate which project the vineyard should choose. [10]

12. A cafe chain’s revenue rises by 30% after it opens four new branches. Explain two ratios that might worsen in the short term. [4]

Answers

1. Investment appraisal is the process of assessing whether a proposed capital project is worth its cost [1]. It is needed because capital spending is large and hard to reverse [1], so the business must check the likely return before committing funds [1]. [3] Examiner insight: a definition saying only “looking at an investment” is thin; credit tends to follow when the answer says what is judged (return against cost) and then develops a reason.

2. Cumulative inflows: £24,000, £54,000, £84,000 [1]. £12,000 is still needed after Year 3, and Year 4 brings £24,000, so 12,000 / 24,000 = 0.5 of a year [1]. Payback is 3 years 6 months [1]. [3] Examiner insight: the cumulative line shows the method even if the final step slips; a decimal answer of 3.5 without converting may lose credit when the question asks for years and months.

3. (a) Total inflows = £280,000, depreciation = 180,000 − 20,000 = £160,000, so total profit = £120,000 [1]. Average profit = 120,000 / 5 = £24,000 [1]. Average investment = (180,000 + 20,000) / 2 = £100,000 [1]. ARR = 24,000 / 100,000 × 100 = 24% [1]. (b) Yes, 24% is above 20% [1]. [5] Examiner insight: writing the formula and the definition of average investment lets a reader follow your method; the final judgement should refer to the 20% target, not just state the percentage.

4. (a) Present values: 22,000 × 0.943 = £20,746; 24,000 × 0.890 = £21,360; 26,000 × 0.840 = £21,840 [1]. Total = £63,946 [1]. NPV = 63,946 − 60,000 = £3,946 [1]. (b) Present values at 10%: £19,998; £19,824; £19,526, total £59,348 [1]. NPV = −£652 [1]. At 6% the van is worthwhile, but at 10% the NPV is negative, so it would be rejected [1]. [6] Examiner insight: the initial cost is paid now and is not discounted; a negative result should be linked to a decision, since the number alone does not answer “how the decision changes”.

5. Two factors, each identified and developed. Employees [1]: new ovens may need retraining or change shift patterns, which affects morale and output [1]. Reputation and product quality [1]: more consistent baking could protect the brand with customers, while disruption during installation could harm it [1]. (Environmental impact is another valid factor.) [4] Examiner insight: answers tend to score better when the factor is tied to a bakery (ovens, bread quality, energy) rather than listed in the abstract.

6. Two limitations. Accounts are historical [1], so ratios may not predict future performance when conditions change [1]. Firms may use different accounting policies [1], which weakens comparison with a competitor [1]. (Ignoring non-financial factors and window dressing are other valid limitations.) [4] Examiner insight: a bare list (“historical, not comparable”) tends to earn less than a limitation that says what goes wrong for the person using the ratio.

7. (a) Dividend cover = profit for the year / annual dividend = 450,000 / 150,000 [1] = 3.0 [1]. (b) Dividend per share = 150,000 / 1,500,000 = 10p [1]. Yield = 10 / 360 × 100 = 2.8% [1]. (c) EPS = 450,000 / 1,500,000 = 30p [1]. P/E = 360 / 30 = 12.0 [1]. [6] Examiner insight: dividend yield and dividend cover use different bases (market price and profit for the year); stating the formula before substituting protects the method.

8. Two ways. The statement of financial position shows existing non-current liabilities [1], so the bank can judge gearing and the risk of adding more debt [1]. The statement of profit or loss shows profit from operations and interest [1], which helps judge whether repayments are affordable [1]. (The directors’ report on plans and risks, or the auditor’s report, are other valid links.) [4] Examiner insight: name the stakeholder’s decision (lend or not) and link each item of the report to it; a general description of the report earns little.

9. (a) Now: capital employed = 5.0 + 3.0 + 2.0 = £10.0m, gearing = 2.0 / 10.0 × 100 = 20% [1]. Shares: capital employed £12.5m, gearing = 2.0 / 12.5 = 16% [1]. Loan: non-current liabilities £4.5m, gearing = 4.5 / 12.5 = 36% [1]. (b) Operating profit after the project = £1.7m. Shares: interest £0.12m, profit before tax £1.58m, profit for the year £1.264m [1], cover = 1.264 / 0.40 = 3.16 [1]. Loan: interest 0.12 + 0.20 = £0.32m, profit for the year (1.7 − 0.32) × 0.8 = £1.104m, cover = 2.76 [1]. (c) ROCE uses profit from operations, which is before interest [1], and both options give the same £1.7m and the same capital employed of £12.5m, so ROCE is 13.6% either way [1]. [8] Examiner insight: analysis improves when you say which ratio the funding choice moves (gearing, cover) and which it does not (ROCE), then link to risk.

10. (a) New cover = 450,000 / 75,000 = 6.0 [1]. New dividend per share = 5p [1]. Yield = 5 / 360 × 100 = 1.4% [1]. (b) Income-seeking shareholders receive half the cash they expected [1], so some may sell, and the share price could fall [1]. [5] Examiner insight: effects on shareholders gain credit when they follow from the numbers (halved yield) rather than a general claim that shareholders will be unhappy.

11. Quantitative: X meets the 20% target and the 3-year payback limit, but only just on payback; Y misses the ARR target [1], though it pays back faster [1]. X has the higher NPV by £5,570 [1], so on value X looks better [1]. Qualitative: X needs three new staff, which adds recurring cost and recruitment risk, but also creates skills and jobs [1]. Y depends on summer tourism, so its cash flows are less reliable, and weather could cut inflows [1]. Y’s early cash helps liquidity [1]. Judgement: choose X, because it meets both criteria and has the higher NPV [1], provided the staff cost is already in the forecast [1]. The decision would change if the vineyard faced a cash shortage or if the discount rate were much higher, since early cash then matters more [1]. [10] Examiner insight: evaluation answers tend to score higher when they weigh both sets of evidence, say what would change the decision, and finish on a clear choice; repeating the table without comment stays at description.

12. Two ratios. Operating profit margin may fall [1], because new branches add rent and wages before they reach full sales [1]. Rate of inventory turnover may fall [1], because stock is held in every new branch before sales build up [1]. (The current ratio or acid test is another valid choice.) [4] Examiner insight: tie each ratio to a cause from the case (new branches), and avoid asserting a ratio worsens without saying why.

Where marks are usually lost

• Discounting the initial cost or forgetting to subtract it in NPV.
• Not stating how average investment was found in ARR.
• Leaving payback as a decimal when the answer should be in years and months.
• Stating a number with no link to the decision or target rate.
• Treating qualitative factors as a list rather than developing one or two in context.
• Mixing up ROCE (before interest) with profit for the year ratios.
• Judging gearing as good or bad without risk and context.
• Evaluating with one side only or no final judgement.

Next steps

• Return to the revision notes and the study guide.
• Check coverage on the checklist and the course hub.
• Try the free 10-minute diagnostics.
• Book a free trial class.

Frequently asked questions

Which sections of Cambridge AS and A Level Business 9609 do these questions cover? Section 10.3 Investment appraisal and section 10.4 Finance and accounting strategy, A Level content covering payback, ARR, NPV and the use of ratios in decisions.

What is the most common mistake in NPV calculations? Discounting the initial cost or forgetting to subtract it. The initial cost is paid now, so it is not discounted; only future cash inflows are multiplied by discount factors.

How should payback be written? In years and months rather than as a decimal, for example 2 years 4 months.

How do I evaluate an investment decision in 9609 Business? Weigh the quantitative results, such as payback, ARR and NPV against targets, alongside qualitative factors developed in context, and reach a final judgement.

Official syllabus

Cambridge International AS & A Level Business 9609 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment, sections 10.3 and 10.4.