#1
Which of the following is NOT a method of evaluating capital budgeting projects?
Return on Investment (ROI)
ExplanationROI does not consider the time value of money.
#2
What does the payback period represent in capital budgeting?
The time it takes to recover the initial investment
ExplanationIt measures the time taken to recoup the initial investment.
#3
Which of the following factors is NOT considered in capital budgeting analysis?
Market share of the company
ExplanationMarket share is not a direct capital budgeting factor.
#4
What does the term 'sunk cost' refer to in capital budgeting?
Costs that have already been incurred and cannot be recovered
ExplanationSunk costs are irreversible past expenditures.
#5
What is the formula for calculating Net Present Value (NPV)?
Future Cash Flows - Initial Investment
ExplanationNPV subtracts initial investment from future cash flows.
#6
What does the term 'discount rate' refer to in capital budgeting?
The rate at which future cash flows are discounted to their present value
ExplanationDiscount rate adjusts future cash flows to present value.
#7
Which capital budgeting technique takes into account the time value of money?
Net Present Value (NPV)
ExplanationNPV discounts future cash flows to their present value.
#8
What does the profitability index (PI) indicate about a project?
The ratio of the present value of future cash flows to the initial investment
ExplanationPI evaluates project's value relative to initial investment.
#9
Which capital budgeting technique uses the accounting rate of return to evaluate projects?
Accounting Rate of Return (ARR)
ExplanationARR assesses project profitability based on accounting measures.
#10
What is the primary drawback of using the payback period as a capital budgeting technique?
It does not consider the time value of money
ExplanationPayback period ignores the time value of money.
#11
Which capital budgeting technique focuses on the accounting profit relative to the initial investment?
Accounting Rate of Return (ARR)
ExplanationARR emphasizes accounting profit against initial investment.
#12
What does the profitability index (PI) equal when the net present value (NPV) is zero?
1
ExplanationPI equals 1 when NPV is zero.
#13
Which capital budgeting technique assumes that cash flows are reinvested at the project's internal rate of return?
Internal Rate of Return (IRR)
ExplanationIRR assumes reinvestment at project's IRR.
#14
Which of the following is a disadvantage of using the profitability index (PI) as a capital budgeting criterion?
It may lead to incorrect investment decisions in certain situations
ExplanationPI can misjudge investments in certain scenarios.
#15
Which of the following capital budgeting techniques is least affected by changes in the discount rate?
Payback Period
ExplanationPayback period disregards discount rate changes.
#16
Which of the following statements about the profitability index (PI) is true?
A PI greater than 1 indicates a desirable project
ExplanationPI above 1 signifies a favorable project.
#17
Which of the following is a limitation of the Payback Period as a capital budgeting technique?
It ignores the timing of cash flows
ExplanationPayback Period disregards cash flow timings.