#1
Which of the following is a key step in capital budgeting?
Forecasting sales revenue
ExplanationCritical for estimating future cash flows.
#2
What does the payback period represent in capital budgeting?
The time it takes to recover the initial investment
ExplanationIndicates investment recovery timeframe.
#3
Which capital budgeting method ignores cash flows beyond the payback period?
Payback period
ExplanationFocuses solely on investment recovery timeframe.
#4
What does the term 'sunk cost' refer to in capital budgeting?
Costs that have been incurred and cannot be recovered
ExplanationIrrecoverable historical expenses.
#5
Which of the following is NOT a capital budgeting technique?
Operating income approach
ExplanationNot a method for investment appraisal.
#6
What is the primary objective of capital budgeting?
Maximizing shareholder wealth
ExplanationKey goal for investment decisions.
#7
What is the Net Present Value (NPV) of a project if its NPV is zero?
The project is not viable
ExplanationZero NPV indicates project's unviability.
#8
What does the profitability index measure in capital budgeting?
The ratio of discounted benefits to costs
ExplanationEvaluates project's benefits against costs.
#9
What is the Internal Rate of Return (IRR) of a project?
The discount rate at which the NPV of a project equals zero
ExplanationRate making project's NPV zero.
#10
Which of the following cash flow estimation methods adjusts for potential inaccuracies in sales forecasts?
Sensitivity analysis
ExplanationAssesses impact of forecast errors.
#11
Which factor is typically ignored in the calculation of the accounting rate of return?
Discount rate
ExplanationNot a factor in ARR calculation.
#12
What is the discount rate used to calculate the present value of cash flows in capital budgeting?
Weighted average cost of capital
ExplanationRepresents cost of capital.
#13
What does the term 'opportunity cost' refer to in capital budgeting?
The potential benefit lost by choosing one investment over another
ExplanationCost of foregone alternatives.
#14
Which of the following factors is NOT considered in the calculation of Net Present Value (NPV)?
Operating income
ExplanationNot a determinant of NPV.
#15
Which of the following is NOT considered a capital budgeting decision?
Deciding on the price of a product
ExplanationProduct pricing is not investment decision.
#16
What is the formula for calculating Net Present Value (NPV)?
NPV = Cash Flows - Initial Investment
ExplanationCalculation of project's present value.
#17
Which of the following factors does NOT affect the calculation of the payback period?
Discount rate
ExplanationNot a determinant of payback period.
#18
What is the purpose of sensitivity analysis in capital budgeting?
To assess the impact of changes in key variables on project outcomes
ExplanationEvaluates project's robustness to changes.
#19
What is the purpose of using discounted cash flow (DCF) analysis in capital budgeting?
To evaluate the time value of money
ExplanationAccounts for money's time value.
#20
Which of the following is a limitation of the payback period method in capital budgeting?
It does not account for cash flows beyond the payback period
ExplanationIgnores cash flows after investment recovery.
#21
What does the term 'capital rationing' refer to in capital budgeting?
The process of selecting projects based on the availability of funds
ExplanationAllocation of limited resources.
#22
Which capital budgeting technique takes into account the time value of money?
Net present value
ExplanationConsiders present value of future cash flows.
#23
In capital budgeting, what is the term for the rate at which the present value of expected cash inflows equals the present value of expected cash outflows?
Internal rate of return
ExplanationRate making NPV zero.