#1
What is the primary goal of capital budgeting?
To maximize shareholder wealth
ExplanationMaximizing shareholder value is the fundamental objective of capital budgeting.
#2
Which of the following is NOT a capital budgeting technique?
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
ExplanationEBITDA is not a capital budgeting technique; it's a measure of a company's operating performance.
#3
What does the Payback Period method measure?
The time it takes to earn back the initial investment
ExplanationPayback Period calculates the time required to recover the initial investment.
#4
Which capital budgeting technique discounts cash flows to their present value?
Net Present Value (NPV)
ExplanationNPV discounts cash flows to present value to assess project profitability.
#5
What is the discount rate used in the Net Present Value (NPV) calculation?
All of the above
ExplanationVarious rates like WACC or opportunity cost can be used as discount rate in NPV calculation.
#6
Which of the following is a limitation of the Payback Period method?
All of the above
ExplanationPayback Period doesn't consider time value of money, cash flows beyond payback, or risk.
#7
Which of the following is a non-discounted cash flow technique?
Payback Period
ExplanationPayback Period doesn't discount cash flows; it's based on simple cash flow recovery.
#8
What is the formula for calculating Net Present Value (NPV)?
Present Value of Cash Inflows - Initial Investment
ExplanationNPV is the difference between present value of cash inflows and initial investment.
#9
What does the Profitability Index (PI) indicate?
The ratio of present value of cash inflows to the initial investment
ExplanationPI compares the present value of future cash flows to the initial investment.
#10
Under which of the following circumstances would the Net Present Value (NPV) and Internal Rate of Return (IRR) methods provide conflicting results?
When projects have the same investment size but different cash flow patterns
ExplanationConflicting results may arise when projects with different cash flow patterns have same initial investment.
#11
What is the formula for calculating Internal Rate of Return (IRR)?
Net Cash Inflows / Initial Investment
ExplanationIRR is the discount rate where NPV of cash inflows equals initial investment.
#12
What does the Profitability Index (PI) indicate about an investment?
The ratio of present value of cash inflows to the initial investment
ExplanationPI compares the present value of cash inflows to the initial investment; a ratio above 1 indicates a favorable investment.