A-Level Business: Investment Appraisal

This material trains the investment appraisal that A level Business papers use to test whether a strategic option is worth the money. Both of the most widely taught boards name the same three techniques: for example, AQA A-level Business section 3.7.8 asks for the calculation and interpretation of payback, average rate of return and net present value, together with investment criteria, non-financial factors, risk and uncertainty and the value of sensitivity analysis, and Pearson Edexcel topic 3.3.2 lists payback, the average (accounting) rate of return and discounted cash flow (net present value only).

The calculations are set the way exam questions set them. Payback is worked with uneven cash flows, so you have to find the year in which the cost is recovered and convert the remaining fraction into months. The average rate of return starts from total net inflows, so the cost of the investment must be taken off before the profit is averaged. Net present value is worked with the discount factors given in the question, including a project whose NPV turns out negative although its undiscounted inflows exceed its cost. The wrong options in the quiz are the slips that produce them: dividing by the wrong year's inflow, forgetting to subtract the cost, discounting a cost that is paid today.

The rest of the material is about judgement. Two projects are compared on all three methods and the methods disagree. A ten per cent fall in inflows shows how quickly a small NPV disappears, and a rise in the discount rate shows why projects whose cash arrives late suffer most. Other questions deal with investment criteria, the timing weakness of ARR, what the discount rate represents, when payback is the sensible method and which factors the figures leave out.

The quiz has twelve questions, each with the working in its explanation. The flashcards hold the formulae and the strengths and weaknesses of each method; no formula sheet is provided in A level Business, so they are there to be learned. The written work has eight longer tasks with every figure given: full payback, ARR and NPV calculations, a two-project recommendation, a sensitivity test, and evaluative questions on non-financial factors, risk and uncertainty and interest rates.

All businesses and figures are invented. The material is practice written by Zestly and is independent of any exam board.

• Calculate the payback period in years and months with even and uneven cash flows
• Calculate the average rate of return from total net inflows, subtracting the cost of the investment first
• Calculate net present value with given discount factors and interpret a positive or negative result
• Compare projects when payback, ARR and NPV point in different directions
• Use sensitivity analysis to judge how far forecasts can fall before a decision changes
• Evaluate investment decisions using investment criteria, risk and uncertainty and non-financial factors

Practice material written by Zestly, based on the A level Business specifications, for example AQA A-level Business (7132) section 3.7.8 and Pearson Edexcel A level Business (9BS0) topic 3.3.2.