Practice 3.8 Investment appraisal with authentic IB Business Management exam questions for both SL and HL students. This question bank mirrors Paper 1, 2, 3 structure, covering key topics like systems and structures, human behavior and interaction, and sustainability and ethics. Get instant solutions, detailed explanations, and build exam confidence with questions in the style of IB examiners.
Paper
Level
Question 1
HLPaper 3
LuminaCare
Resource 1 – Company profile and financial context
LuminaCare is a Ghana-based, for-profit social enterprise that manufactures solar-powered medical devices for rural clinics and maternal health centers across Sub-Saharan Africa. Its flagship product is a solar fetal heart monitor, which allows midwives to detect complications during pregnancy without relying on grid electricity. The company raised seed capital from impact investors but has now reached an inflection point: demand has grown by 300%, and LuminaCare must decide whether to pursue a $2.5M Series A equity round or take on $1.2M in concessional debt from a development bank.
Resource 2 – CFO’s internal memo (Finance)
“Our burn rate is steady, but we’ve reached our credit limit with suppliers. We operate on 90-day payment terms with clinics, so cash flow is always tight. Series A equity gives us the scale to meet demand and build a second facility—but would dilute founder control and introduce board-level oversight. The concessional loan is low-interest and non-dilutive but comes with covenants: quarterly EBITDA targets, strict capex limits, and donor-style reporting. Any miss could trigger loan restructuring or early repayment.”
Resource 3 – HR performance dashboard (Q1–Q2 2025)
| Metric | Value |
|---|---|
| Staff turnover (last 6 months) | 22% |
| Time to fill technical roles | 49 days (↑ 24%) |
| % of roles with formal job descriptions | 58% |
| Managerial span of control | Avg. 12 direct reports |
| Avg. team engagement score | 67/100 (↓ from 78) |
| The head of HR notes that burnout and unclear career paths are leading to attrition, especially among product engineers and field deployment staff. |
Resource 4 – Marketing team proposal
“Clinics love our mission—but most have no idea who we are until we show up at trade shows. We need to invest in inbound marketing, including a multilingual website, CRM tools, and a referral rewards program for midwives. More crucially, we’re perceived as a donor-funded nonprofit, not a serious tech company. To attract hospital procurement officers and larger buyers, we must reposition the brand to emphasize product quality, not just affordability and ethics.”
Resource 5 – Email thread: CEO to CFO and Marketing Lead
Resource 6 – Feedback from key field partners
“We rely on LuminaCare’s devices, but their response time for repairs has worsened.” “Sometimes we get different pricing from different reps. There’s no standard process.” “I love the mission—but our procurement officer wants a brand that feels serious. A logo change isn’t enough.”
1.[2]
With reference to Resource 3, describe one HR issue that may be impacting LuminaCare’s ability to scale sustainably.
2.[6]
Explain one financial challenge and one marketing challenge LuminaCare may face if it accepts the concessional loan.
3.[17]
Using all the resources provided and your knowledge of business management tools and theories, recommend a possible plan of action for LuminaCare over the next five years.
Question 2
HLPaper 2
FreshSteps Foundation
FreshSteps Foundation is a non-profit social enterprise based in Kenya that installs small-scale water filtration systems in rural communities. It operates as a private limited company (Ltd) but reinvests all surplus profits to expand its social impact rather than paying dividends.
Its business objectives include achieving financial sustainability and maintaining a minimum return on capital employed (ROCE) of 5% to fund future installations without relying heavily on grants.
Table 1: Statement of Profit or Loss for FreshSteps Foundation for the year ending 31 December 2024 (figures in $000)
| Item | Amount ($000) |
|---|---|
| Sales revenue | 2,600 |
| Cost of sales | 1,300 |
| Operating expenses | 1,050 |
| Depreciation expense | 100 |
| Interest expense | 40 |
| Tax | — (tax-exempt) |
Table 2: Additional Financial Information
| Item | Amount ($000) |
|---|---|
| Capital employed | 3,500 |
| Current assets | 480 |
| Current liabilities | 400 |
| Initial investment for new project | 800 |
| Net annual cash inflow from project | 220 |
1.[2]
Calculate the gross profit for FreshSteps Foundation. Show all your working.
2.[2]
State why FreshSteps Foundation is tax exempt.
3.[2]
Calculate the current ratio for FreshSteps Foundation. Show all your working.
4.[2]
Calculate the payback period for the new project. Show all your working.
5.[2]
Explain one financial challenge that FreshSteps Foundation may face by relying on project-based cash inflows.
Question 3
HLPaper 2
VisionWare Ltd.
VisionWare Ltd. specializes in AI-powered smart home devices. The company is planning to launch a new product and must choose between two investment projects: Project Alpha and Project Beta.
| Investment Data for VisionWare Ltd. |
|---|
| Initial investment (both projects) |
| Project Alpha: total net cash inflows (4 years) |
| Project Beta: total net cash inflows (3 years) |
| Project Alpha: Yearly inflows: Y1 180,000, Y3 180,000 |
| Project Beta: Yearly inflows: Y1 200,000, Y3 $100,000 |
| Discount rate for NPV |
VisionWare Ltd. is also reorganizing internal reporting, assigning responsibility for controlling spending in different departments.
In addition, management is focused on protecting their proprietary AI algorithms from competitors and using customer data to identify emerging needs before competitors do.
1.[2]
Calculate the payback period for Project Beta.
2.[2]
Calculate the average rate of return (ARR) for Project Alpha.
3.[2]
Calculate the Net Present Value (NPV) for Project Beta, assuming a 10% discount rate and using approximate NPV factors:
- Year 1: 0.91
- Year 2: 0.83
- Year 3: 0.75
4.[2]
Identify the difference between cost centres and profit centres within an organization like VisionWare Ltd.
5.[2]
Suggest one reason why protecting intellectual property is important for VisionWare Ltd.
Question 4
SLPaper 2
VibeAudio Ltd.
VibeAudio Ltd. is a company that designs and sells high-end wireless speakers targeted at design-conscious music enthusiasts. The business recently underwent a brand refresh and developed a new marketing plan targeting younger consumers. Based on insights from focus groups and competitor analysis, the company adjusted several elements of its marketing mix, including the product design, pricing strategy, and promotional platforms.
To support the launch of a new speaker model, the business secured a medium-term bank loan and allocated funds from retained profit to cover upfront development costs. The finance team is preparing a statement of profit or loss to evaluate the performance of the new speaker and is also assessing the viability of investing in a new flagship showroom.
Table 1: Financial data for VibeAudio Ltd. – New Speaker Product (Q1 2024)
| Item | Amount ($) |
|---|---|
| Units sold | 1,200 |
| Selling price per unit | 180.00 |
| Variable cost per unit | 75.00 |
| Advertising and promotion | 25,000 |
| Salaries (marketing/admin) | 40,000 |
| Loan interest | 3,500 |
| Office rent and utilities | 12,000 |
| Tax rate | 25% |
| Dividends paid | 5,000 |
1.[2]
Explain how the insights from VibeAudio Ltd.’s market research could shape its marketing planning.
2.[2]
Suggest one element of the marketing mix that appears to have been prioritised in the launch
3.[2]
Using the data in table 1, construct a statement of profit or loss for the new speaker product
4.[2]
Based on your statement, explain whether the new speaker model appears to be financially sustainable.
5.[2]
The company is considering investing $90,000 in a flagship showroom. The showroom is expected to generate annual net cash inflows of $35,000 for three years.
Calculate the payback period for this investment. Show all your working.
Question 5
HLPaper 2
GreenGadget Innovations
GreenGadget Innovations is a technology company that produces environmentally friendly electronic devices. The company has grown steadily over the past three years and is now planning a major investment to enhance its market share. Management is evaluating two projects: (1) launching a new product line of solar-powered smartwatches or (2) upgrading its manufacturing facilities to improve efficiency and reduce costs.
Both options require significant financial investment. To ensure the company manages its resources effectively, GreenGadget also plans to implement a more detailed budgeting system to control expenses and forecast revenues accurately.
The following financial data is provided:
1.[6]
Calculate the payback period and net present value (NPV) for both investment options (Solar Smartwatch and Facility Upgrade). Recommend which project GreenGadget should pursue based on your calculations.
2.[4]
Discuss the importance of budgeting for GreenGadget Innovations in managing its financial resources, especially when implementing a significant investment.
3.[4]
Analyze how GreenGadget can use capital budgeting techniques to prioritize between these two investment projects.
4.[10]
Evaluate the potential risks and rewards of launching the solar smartwatch compared to upgrading the manufacturing facilities.
Question 6
HLPaper 2
RapidFit Gym
RapidFit Gym is a small chain of fitness centers offering affordable memberships and group classes. The company has seen consistent growth over the past five years but is now facing increased competition from boutique fitness studios and online fitness platforms.
RapidFit is considering investing in a new gym location or upgrading its existing facilities to attract more members. The management is also concerned about operational inefficiencies, particularly with inventory management for gym equipment and receivables from corporate clients who pay for bulk memberships.
The following financial data is provided for the year ending December 31, 2023:
| Financial Metric | Value (USD) |
|---|---|
| Revenue | 2,000,000 |
| Cost of Goods Sold (COGS) | 1,200,000 |
| Operating Expenses | 600,000 |
| Net Profit | 200,000 |
| Average Inventory | 100,000 |
| Average Accounts Receivable | 120,000 |
| Initial Investment for New Gym | 1,000,000 |
| Initial Investment for Upgrade | 500,000 |
| Projected Annual Cash Flow (Gym) | 200,000 |
| Projected Annual Cash Flow (Upgrade) | 120,000 |
| Discount Rate | 10% |
| Useful Life (years) | 5 |
1.[4]
Calculate the payback period and net present value (NPV) for both investment options (new gym location and upgrade).
2.[4]
Using the provided data, analyze RapidFit’s inventory turnover ratio and evaluate its operational efficiency.
3.[4]
Explain the impact of inefficiencies in receivables management on RapidFit’s liquidity and suggest strategies to address this issue.
Question 7
HLPaper 2
TerraCraft Ltd (TC)
TerraCraft Ltd (TC) manufactures sustainable furniture products in Sweden. Due to increasing demand, TC is considering investing in a new production facility. To determine the viability of this investment, TC’s finance team has performed an investment appraisal, calculating payback periods and net present value (NPV).
To enhance efficiency and productivity, TC is also evaluating its current operations methods, debating a shift from job production to batch or flow production. The company recently analyzed its operational performance using efficiency ratio analysis, revealing lower-than-expected inventory turnover and declining productivity ratios.
TC has a strong, environmentally-driven organizational culture valued by its stakeholders. However, stakeholders, including employees and environmental activists, are concerned that rapid operational expansion and changes in production methods could negatively affect this culture and TC’s sustainability commitments.
1.[2]
Define the term ‘investment appraisal’.
2.[4]
Explain two potential stakeholder conflicts that might result from TC changing its operations methods.
3.[4]
Explain two benefits for TC of using efficiency ratio analysis.
4.[4]
Outline two ways TC’s strong organizational culture contributes to its business success.
5.[10]
Examine whether TC should switch from job production to flow production to improve efficiency, considering stakeholder concerns, organizational culture, and investment appraisal results.
Question 8
SLPaper 2
Galileo Manufacturing Ltd. (GM)
Galileo Manufacturing Ltd. (GM) is a private limited company that operates a manufacturing facility on the International Space Station. Using a three-dimensional (3D) printer, GM manufactures parts and tools for use by the National Aeronautics and Space Administration (NASA) of the United States (US) government. NASA is GM’s sole customer. Soon, GM will expand its manufacturing capacity to make large items, such as satellites, that NASA can then put into orbit.
A new manufacturing facility with increased capacity will cost $40 million. Expected profit from the new manufacturing facility is given in Table 1 below.
Table 1: Expected profit from GM’s new manufacturing facility
| Year | 1 | 2 | 3 | 4 |
|---|---|---|---|---|
| Forecasted annual profit (in millions of dollars) | 8 | 12 | 16 | 16 |
The US government has contracted to purchase the manufacturing facility from GM at the end of four years for $2.5 million.
1.[2]
Explain one reason for GM manufacturing on the International Space Station.
2.[2]
For the new manufacturing facility, calculate the payback period (show all your working)
3.[2]
Comment on the new manufacturing facility's payback period, based on your answer in question 2.
4.[2]
State two advantages of a private limited company.
5.[2]
Calculate the average rate of return (ARR) (show all your working);
Question 9
HLPaper 2
Solar Soccer Academy Ltd. (SSA) Solar Soccer Academy Ltd. (SSA) is a private limited company set up five years ago by Stephen Murdock. It provides top-quality soccer (football) skills and technique coaching. So far, SSA has been a success, and Stephen is deciding whether to open another academy in a neighbouring city. The cost of building a second academy is $500 000. Stephen has produced forecasted financial information for the second academy’s first five years of operation:
Table 1. Forecasted financial information for a second academy
| Year | Cash inflow ($) |
|---|---|
| 1 | 160 000 |
| 2 | 200 000 |
| 3 | 240 000 |
| 4 | 375 000 |
| 5 | 700 000 |
Stephen estimates cash outflow to be 25 % of the total cash inflow in years 1, 2 and 3 and 20 % of the total cash inflow in years 4 and 5.
1.[2]
State two features of a private limited company.
2.[2]
Calculate SSA’s the payback period for a second academy(show all your working);
3.[2]
Calculate SSA’s average rate of return (ARR) for the first five years of operation (show all your working);
4.
[2]
Calculate SSA’s net present value (NPV) at a discount rate of 4 % (see Table 2) (show all your working).
| Year | Discount rate |
|---|---|
| 1 | 0.9615 |
| 2 | 0.9246 |
| 3 | 0.8890 |
| 4 | 0.8548 |
| 5 | 0.8219 |
5.[2]
Explain one disadvantage for SSA of only using the payback period method in making its decision to open a second academy.
Question 10
HLPaper 2
ClearView Tech
ClearView Tech is a company that designs and manufactures innovative smart glass products for residential and commercial buildings. These products allow users to control the amount of light and heat entering a room, reducing energy consumption. The company has been profitable in recent years but faces rising production costs and increasing competition from new entrants.
To address these challenges, ClearView Tech is considering two investment options: (1) launching a new automated production line to improve efficiency and reduce costs, or (2) expanding its product range to include a budget-friendly version of its smart glass. The management is also planning to refine its budgeting system to better control operating expenses and improve cash flow management.
Below is selected financial data for ClearView Tech for the year ending December 31, 2023:
Investment Options
| Financial Metric | Automated Line | New Product Range |
|---|---|---|
| Initial Investment (USD) | 2,500,000 | 1,800,000 |
| Projected Annual Cash Flow (USD) | 600,000 | 450,000 |
| Useful Life (years) | 5 | 5 |
| Residual Value (USD) | 500,000 | 200,000 |
| Discount Rate | 10% | 10% |
Additional Company Financial Data
| Financial Metric | Value (USD) |
|---|---|
| Revenue | 10,000,000 |
| Cost of Goods Sold (COGS) | 6,000,000 |
| Operating Expenses | 2,500,000 |
| Net Profit | 1,500,000 |
| Average Inventory | 400,000 |
| Average Accounts Receivable | 600,000 |
| Average Accounts Payable | 350,000 |
| Marketing Budget | 700,000 |
| Capital Budget | 3,000,000 |
1.[4]
Using the data provided, calculate and analyze the inventory turnover and receivables days ratios for ClearView Tech. Evaluate how these ratios reflect the company’s efficiency.
2.[4]
Calculate the net present value (NPV) for both investment options (Automated Line and New Product Range). Recommend which investment ClearView Tech should pursue based on your calculations.
3.[4]
Analyze the importance of budgeting in managing ClearView Tech’s financial resources, particularly in relation to these investment decisions.
4.[10]
Evaluate the strategic implications of the automated production line compared to the new product range in addressing ClearView Tech’s challenges.