#1
What is Capital Budgeting?
A process of analyzing and selecting long-term investment projects
ExplanationSelection of long-term investments.
#2
Which of the following is NOT a capital budgeting technique?
Cost of Goods Sold (COGS)
ExplanationNot a method for investment evaluation.
#3
Which of the following is NOT a component of capital budgeting?
Project financing
ExplanationNot part of capital budgeting components.
#4
What is the objective of capital budgeting?
To allocate financial resources to long-term investments
ExplanationAllocation of resources for long-term investments.
#5
Which of the following factors is NOT considered in capital budgeting?
Market share
ExplanationExclusion from capital budgeting considerations.
#6
What does the Payback Period measure?
The time it takes to recoup the initial investment
ExplanationTime to recover initial investment.
#7
Which of the following is a disadvantage of the Internal Rate of Return (IRR) method?
It may result in multiple rates of return
ExplanationPotential for multiple returns.
#8
What is the Discounted Payback Period?
The time it takes for a project's cumulative discounted cash flows to equal its initial investment
ExplanationDuration for discounted cash flows to cover initial investment.
#9
Which of the following is a capital budgeting decision criterion that considers both the size and timing of cash flows?
Net Present Value (NPV)
ExplanationEvaluating cash flows' size and timing.
#10
What does the Profitability Index (PI) indicate?
The ratio of net present value to initial investment
ExplanationRatio of NPV to initial investment.
#11
What is the purpose of sensitivity analysis in capital budgeting?
To analyze the impact of uncertainty in project variables on NPV or IRR
ExplanationAssessing variable impact on NPV or IRR.
#12
What is the main drawback of using the Payback Period as the sole criterion for project evaluation?
It does not consider the time value of money
ExplanationNeglects time value of money.
#13
What is the formula for Net Present Value (NPV)?
NPV = Present Value of Cash Flows - Initial Investment
ExplanationCalculation formula for NPV.
#14
Which of the following statements is true about the Profitability Index (PI)?
A project with a PI greater than 1 is considered desirable
ExplanationDesirability criterion based on PI greater than 1.
#15
What is the primary goal of cost-benefit analysis in capital budgeting?
To maximize shareholder wealth
ExplanationWealth maximization objective.
#16
Which of the following factors is NOT typically considered in cost estimation for capital budgeting?
Sunk costs
ExplanationExclusion from cost estimation considerations.
#17
What does the term 'opportunity cost' refer to in the context of capital budgeting?
The cost of an alternative foregone when a decision is made
ExplanationCost of alternative choices.
#18
What is the main objective of sensitivity analysis in capital budgeting?
To analyze how sensitive a project's NPV is to changes in its sales volume, cost, or other factors
ExplanationExamining NPV sensitivity to variable changes.
#19
What is the Modified Internal Rate of Return (MIRR) method?
A method that adjusts the IRR to reflect the timing of cash flows
ExplanationIRR adjustment for cash flow timing.
#20
Which of the following is a non-discounted cash flow technique?
Payback Period
ExplanationEvaluation without discounting cash flows.
#21
What is the primary limitation of the Net Present Value (NPV) method?
It relies on accurate estimates of future cash flows
ExplanationDependency on precise cash flow estimates.
#22
Which of the following is a characteristic of a mutually exclusive project?
The acceptance of one project precludes the acceptance of another
ExplanationInability to undertake multiple projects simultaneously.
#23
What does the Modified Internal Rate of Return (MIRR) address?
It addresses the issue of multiple IRRs
ExplanationResolution of multiple IRR problem.
#24
Which of the following is an example of a qualitative factor in capital budgeting?
Market demand for the product
ExplanationNon-quantitative consideration in evaluation.
#25
What is the main advantage of using the Real Options Approach in capital budgeting?
It allows for flexibility in decision-making
ExplanationDecision-making flexibility enhancement.