Investment Decision Quality Assessment

Investment Decision Quality Assessment

Test the Quality of Your Investment Decisions

Investment decisions are not driven by numbers alone. They also depend on your ability to analyze incomplete information, assess risk, recognize and avoid cognitive biases, and make sound decisions under pressure. This assessment includes 15 practical scenarios across 5 rounds, simulating real-world decisions that investors, board members, and investment committees may face. Read each scenario carefully, then select the most rational and professionally sound decision based on the information available.

/15

15 questions across 5 rounds designed to assess your ability to analyze complex situations and make sound investment decisions.

Select one answer for each question.

1 / 15

You have an opportunity to acquire a 35% stake in a company valued at SAR 12 million. The company has achieved 42% revenue growth over the past two years, with an EBITDA margin of 18%, while the market is growing at 11% annually. The founder is requesting that the deal be closed within 10 days due to interest from a competing investor. What is the most rational course of action?

A) Proceed with the investment because the growth and profit margins justify the risk.

B) Reject the deal because the due diligence period is insufficient.

C) Negotiate a temporary exclusivity period conditional on completing due diligence, focusing on the assumptions that could materially change the investment decision.

D) Reduce the valuation by 20% and proceed with the deal immediately.

2 / 15

While evaluating the previous deal, you have enough time to examine only one metric in depth before the Investment Committee meeting. Which is the most important?

A) Historical revenue growth

B) EBITDA for the most recent year

C) Quality of earnings and the ability of operating cash flows to support the reported profits

D) Current market share

3 / 15

An investment project requires SAR 10 million. The base-case scenario generates a positive NPV of SAR 3 million, but 65% of the expected value depends on achieving a selling price that has not yet been tested in the market. What is the most prudent decision?

A) Approve the project because the NPV is positive

B) Reject the project because it relies heavily on a single assumption

C) Conduct a sensitivity analysis and test the selling price before committing the full amount of capital

D) Reduce the discount rate to compensate for the uncertainty

4 / 15

A board of directors is discussing entering a new market. At the beginning of the meeting, the CEO, who has the most extensive experience in the sector, strongly expressed his support for entering the market. Later, 7 out of 8 board members supported the decision, despite studies showing mixed indicators. What is the greatest risk?

A) Confirmation Bias only

B) Overconfidence Bias only

C) Anchoring combined with Authority Bias and the potential for Groupthink

D) Availability Bias

5 / 15

A company conducted a market study to enter a new sector. The primary study indicates a promising opportunity, but an independent report estimates the probability of project failure at 35%. Management considers the independent report "overly conservative." What is the best course of action?

A) Rely on the primary study because it is more detailed

B) Calculate the average of the results from both studies

C) Identify the assumptions driving the differences, conduct a pre-mortem analysis to anticipate potential causes of failure, and test downside scenarios

D) Commission a third study before making any decision

6 / 15

A restaurant business model in Riyadh has successfully achieved a 24% ROIC. Management proposes opening 20 branches across four cities within two years. Which of the following information, if discovered, should have the greatest impact on the expansion decision?

A) The brand has achieved strong growth on social media

B) 55% of the Riyadh branch's profits are driven by exceptionally high demand within a small geographic area that would be difficult to replicate

C) The CEO has 18 years of experience

D) Rental rates in the other cities are 12% lower

7 / 15

A company has invested SAR 40 million in a factory that has not yet commenced commercial operations. The factory requires an additional SAR 12 million to become operational. After investing the additional SAR 12 million, the project's expected present value would be SAR 18 million. The cost of shutting down the project now is SAR 3 million. Which information is most important for making the decision?

A) The fact that the company has already spent SAR 40 million

B) The book value of the factory

C) The project's future economic value compared with the cost of completing it and alternative uses of the capital

D) The number of years the construction process has taken

8 / 15

After disregarding the previously invested SAR 40 million as a sunk cost, you have two options: invest an additional SAR 12 million to obtain an asset with an expected economic value of SAR 18 million, or invest the same amount in an alternative project with an expected present value of SAR 22 million and a similar risk profile. Which option would you choose?

A) Complete the factory because it generates positive value

B) Choose the alternative project because the opportunity cost makes completing the factory less attractive

C) Split the investment between the two projects

D) Complete the factory to protect management's reputation

9 / 15

A project is underperforming, but shutting it down would result in the loss of a strategic client and could negatively affect another profitable business activity. Should the project be discontinued?

A) Yes, because the project itself is unprofitable

B) No, because the potential loss of the client prevents the project from being discontinued

C) The decision should be based on the combined economic value of the portfolio rather than the profitability of the project in isolation

D) Continue the project for one year and then reassess

10 / 15

You are considering three one-year investments:

A: +14% return with a 90% probability, and an -8% loss with a 10% probability
B: +35% return with a 60% probability, and a -25% loss with a 40% probability
C: +100% return with a 25% probability, and a -40% loss with a 75% probability

If you consider Expected Return only, which investment has the highest expected return?

A) A

B) B

C) C

D) A and B are equal

11 / 15

Although Investment C may offer an attractive expected return, why might rejecting it still be a rational decision?

A) Because high-return investments are always bad

B) Because the average return alone does not reflect the probability and magnitude of potential losses or their impact on the investor's ability to remain financially sustainable

C) Because the probability of success is below 50%

D) Because Investment A is safer

12 / 15

An investment fund can tolerate a maximum annual loss of 15% before breaching its financing covenants. A new investment would increase the portfolio's expected return from 12% to 17%, but it would also increase the potential loss under a stress scenario from 11% to 23%. What is the most professional course of action?

A) Proceed with the investment because the expected return has increased by 5 percentage points

B) Reject the investment entirely

C) Restructure the position size or implement hedging strategies so that potential losses remain within the fund's risk tolerance limits

D) Accept the risk because the downside scenario is uncertain

13 / 15

A company is considering building a new factory with an investment of SAR 80 million. The feasibility study indicates an Internal Rate of Return (IRR) of 21%, compared with a Weighted Average Cost of Capital (WACC) of 11%. However, 45% of the projected sales depend on a single customer who has provided a non-binding Letter of Intent (LOI). What is the best decision?

A) Approve the project because the IRR is significantly higher than the WACC

B) Reject the project due to customer concentration risk

C) Recalculate the project's feasibility under multiple scenarios reflecting the probability and volume of the customer's purchases, and link the investment decision to specific contractual milestones

D) Approve the project while increasing the selling price to compensate for the risk

14 / 15

Following the analysis, if the primary customer purchases no volume, the Internal Rate of Return (IRR) falls to 7%. If the customer purchases half of the projected volume, the IRR becomes 13%. If the full projected volume is achieved, the IRR reaches 21%. What is the most accurate conclusion?

A) The project is profitable because the average IRR is higher than the WACC

B) The investment fundamentally involves a significant bet on demand from a single customer materializing as projected

C) The project should be rejected because the worst-case scenario generates a return below the WACC

D) 21% is the IRR that should be presented to the Board of Directors

15 / 15

The supplier is offering an 8% discount on equipment costs if the company commits to the full order this month. Alternatively, the company can conduct a pilot project costing SAR 6 million, which would delay the project by six months but would help determine the actual level of demand with a high degree of confidence before investing the remaining SAR 80 million. What is the best decision?

A) Accept the 8% discount because the reduction in capital expenditure is guaranteed

B) Proceed with the full project because of the cost of delay

C) Compare the value of the information generated by the pilot project with the cost of the delay and the lost discount, and make the decision based on the Expected Value of Information

D) Always conduct the pilot project because testing involves less risk

Your score is

Investment Decision Quality Assessment

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