#1
What is Capital Budgeting?
Budgeting for long-term investment decisions
ExplanationFocuses on allocating resources for long-term projects.
#2
Which of the following is NOT a capital budgeting technique?
Cash Flow Statement
ExplanationNot a method for evaluating investment projects.
#3
Which of the following factors are considered in capital budgeting?
All of the above
ExplanationVarious factors including risk, cash flows, and market conditions.
#4
Which capital budgeting method emphasizes the percentage return on investment?
Internal Rate of Return (IRR)
ExplanationFocuses on rate of return that equates present value of inflows to outflows.
#5
Which of the following is a non-discounted cash flow technique in capital budgeting?
Payback Period
ExplanationMethod based solely on time taken to recover investment.
#6
What is the primary objective of capital budgeting?
To maximize the value of the firm by investing in projects with positive net present values
ExplanationGoal is to enhance firm value through profitable investments.
#7
What does the Internal Rate of Return (IRR) represent?
The discount rate that makes the NPV of a project zero
ExplanationRate of return where project's NPV equals zero.
#8
What is the main drawback of the Payback Period method?
It ignores cash flows after the payback period
ExplanationDoes not consider cash flows beyond recovery period.
#9
What is the formula for calculating Net Present Value (NPV)?
NPV = Cash Inflows - Initial Investment
ExplanationSubtracting initial investment from present value of cash inflows.
#10
What does the Profitability Index (PI) indicate?
The ratio of the present value of cash inflows to the initial investment
ExplanationMeasures efficiency by comparing present value of benefits to cost.
#11
In capital budgeting, what is the 'sunk cost'?
Costs that have already been incurred and cannot be recovered
ExplanationExpenses that cannot be reversed or retrieved.
#12
What is the Discounted Payback Period?
The time required to recover the initial investment considering discounted cash flows
ExplanationTime taken to recoup initial investment, factoring in time value of money.
#13
Which capital budgeting method is considered the most reliable for evaluating mutually exclusive projects?
Net Present Value (NPV)
ExplanationCompares present value of cash inflows to initial investment.
#14
Which of the following statements about the Modified Internal Rate of Return (MIRR) is correct?
MIRR assumes reinvestment at the project's cost of capital and financing at the project's IRR.
ExplanationAdjusts IRR by considering reinvestment and financing rates.
#15
What is the primary advantage of using the Net Present Value (NPV) method over other capital budgeting techniques?
NPV accounts for the time value of money and considers all cash flows over the project's life.
ExplanationConsiders cash flows' timing and value, providing comprehensive analysis.
#16
Which of the following is a limitation of the Profitability Index (PI) method?
It may provide conflicting rankings when projects are mutually exclusive.
ExplanationRanking inconsistency when selecting among mutually exclusive projects.
#17
What does the term 'real options' refer to in capital budgeting?
The flexibility to make decisions during the project's life based on changing market conditions.
ExplanationAbility to adjust project decisions in response to market changes.
#18
Which of the following factors is NOT considered in the sensitivity analysis of a capital budgeting project?
Initial investment
ExplanationNot a variable examined for its impact on project viability.