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Financial Management Flashcards

6 cards from real ACCA AS practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. Net present value (NPV) is calculated as:

    Answer: The sum of present values of future cash flows minus the initial investment

    NPV = Sum of discounted future cash inflows − Initial investment. A positive NPV indicates the investment earns more than the cost of capital, adding value to the firm.

  2. The internal rate of return (IRR) is:

    Answer: The discount rate at which NPV equals zero

    IRR is the discount rate that makes the NPV of a project exactly zero. If IRR > cost of capital, the project is acceptable; if IRR < cost of capital, reject.

  3. Which of the following is a limitation of the payback period as an investment appraisal method?

    Answer: It ignores cash flows arising after the payback period

    Payback ignores all cash flows occurring after the payback period is reached, meaning it can favour short-term projects over more profitable long-term ones.

  4. The weighted average cost of capital (WACC) represents:

    Answer: The average after-tax cost of all long-term financing, weighted by market values

    WACC is the blended cost of all sources of capital (equity and debt), each weighted by its proportion of total capital at market value. It is used as the discount rate for investment appraisal.

  5. Working capital management involves balancing:

    Answer: The levels of current assets and current liabilities to maintain liquidity and profitability

    Working capital management aims to optimise current assets (inventory, receivables, cash) and current liabilities (payables, overdraft) to maintain sufficient liquidity while maximising profitability.

  6. The operating cycle (cash conversion cycle) measures:

    Answer: The time from paying for raw materials to collecting cash from customers

    The cash conversion cycle = inventory days + receivable days − payable days. It measures the net time a business's cash is tied up in working capital.