#1
Which of the following is a method used in capital budgeting to evaluate the profitability of an investment?
Net Present Value (NPV)
ExplanationNPV assesses the difference between present values of cash inflows and initial investment.
#2
What is the payback period of an investment?
The time it takes for the investment to earn back its initial cost
ExplanationPayback period is the duration required for an investment to recover its initial outlay.
#3
Which of the following is NOT a primary capital budgeting method?
Earnings Per Share (EPS)
ExplanationEPS is not a capital budgeting method; it's an indicator of a company's profitability.
#4
What is the primary objective of capital budgeting?
To maximize shareholder wealth
ExplanationThe primary goal of capital budgeting is to enhance shareholder wealth by making sound investment decisions.
#5
Which of the following factors is typically considered when estimating cash flows in capital budgeting?
All of the above
ExplanationEstimating cash flows involves considering various factors, including revenues, expenses, and taxes.
#6
What does the Internal Rate of Return (IRR) represent in capital budgeting?
The discount rate that makes the net present value of a project zero
ExplanationIRR is the rate at which a project's NPV becomes zero, indicating project profitability.
#7
In capital budgeting, what does the term 'sunk cost' refer to?
A cost that has already been incurred and cannot be recovered
ExplanationSunk cost is an expense that cannot be regained and should not influence future decisions.
#8
What is the formula for calculating Net Present Value (NPV) of an investment?
NPV = Sum of Present Values of Cash Inflows - Initial Investment
ExplanationNPV calculation involves subtracting initial investment from the sum of present values of cash inflows.
#9
What does the profitability index (PI) measure in capital budgeting?
The ratio of discounted cash inflows to initial investment
ExplanationPI gauges the efficiency of an investment by comparing discounted cash inflows to the initial investment.
#10
What is the formula for calculating the accounting rate of return (ARR) on an investment?
ARR = (Net Profit / Average Investment) * 100
ExplanationARR calculation involves expressing net profit as a percentage of the average investment.
#11
Which of the following capital budgeting techniques considers the time value of money?
Discounted Payback Period
ExplanationDiscounted Payback Period incorporates time value of money when evaluating the time needed to recoup an investment.
#12
Which of the following factors is NOT considered in capital budgeting analysis?
Market Share
ExplanationMarket Share is not typically a consideration in capital budgeting analysis; it's more relevant to marketing strategy.
#13
What is the main drawback of using the payback period as a capital budgeting technique?
It ignores the time value of money
ExplanationPayback period neglects the impact of time value of money, potentially leading to inaccurate investment assessments.
#14
What is the main advantage of the Internal Rate of Return (IRR) method in capital budgeting?
It considers all cash flows over the project's lifespan
ExplanationIRR evaluates project profitability by considering all cash flows throughout its lifespan.
#15
What is the formula for calculating the profitability index (PI) when cash flows are uniform?
PI = Present Value of Cash Inflows / Initial Investment
ExplanationPI calculation involves dividing the present value of uniform cash inflows by the initial investment.