#1
Which of the following is a capital budgeting technique?
Net present value (NPV)
ExplanationNPV measures the difference between the present value of cash inflows and outflows, helping assess a project's profitability.
#2
What does the payback period measure in capital budgeting?
Time required to recover the initial investment
ExplanationPayback period represents the time taken to recoup the initial investment, indicating project liquidity.
#3
Which discount rate is commonly used in the net present value (NPV) method?
Weighted average cost of capital (WACC)
ExplanationWACC is the discount rate that reflects a firm's cost of capital, crucial in NPV calculations.
#4
What is the main advantage of the internal rate of return (IRR) method in capital budgeting?
Always results in a unique solution
ExplanationIRR provides a single rate at which the project's net present value is zero, aiding decision-making.
#5
What is the accounting rate of return (ARR) in capital budgeting?
The rate of return based on accounting profits
ExplanationARR assesses project profitability based on accounting profits rather than cash flows.
#6
How does sensitivity analysis contribute to capital budgeting decisions?
By analyzing the impact of uncertainties on project outcomes
ExplanationSensitivity analysis assesses how variations in project variables affect outcomes, aiding decision-makers in risk assessment.
#7
What is the primary focus of the replacement project analysis in capital budgeting?
Evaluating the cost of replacing outdated equipment
ExplanationReplacement project analysis evaluates the cost-effectiveness of replacing outdated equipment with a new investment.
#8
What role does the salvage value play in the net present value (NPV) calculation?
It is added to the final cash inflows of the project.
ExplanationSalvage value contributes to NPV by adding the expected value of assets at the end of a project's life.
#9
Which capital budgeting technique considers the time value of money and provides a dollar value for the expected profitability of a project?
Net Present Value (NPV)
ExplanationNPV accounts for time value of money, offering a monetary measure of a project's expected profitability.
#10
In capital budgeting, what does the term 'mutually exclusive projects' mean?
Projects that cannot be undertaken simultaneously
ExplanationMutually exclusive projects are alternative investments, and only one can be chosen due to resource constraints.
#11
What is the primary drawback of the payback period as a capital budgeting criterion?
Ignores the time value of money
ExplanationPayback period neglects the time value of money, potentially leading to inaccurate project assessments.
#12
How does the profitability index (PI) differ from the net present value (NPV) method?
PI is expressed as a percentage, while NPV is in monetary terms.
ExplanationPI expresses project profitability as a percentage, facilitating comparison, unlike NPV's monetary representation.
#13
What is the concept of cannibalization in the context of capital budgeting?
The impact of a new project on sales of existing products
ExplanationCannibalization assesses how a new project may affect sales of existing products, influencing overall revenue.
#14
In the context of capital budgeting, what is the significance of the risk-adjusted discount rate?
It adjusts the discount rate based on the perceived risk of the project.
ExplanationThe risk-adjusted discount rate accounts for project risk, influencing the discount rate used in evaluations.
#15
What is the formula for calculating the profitability index (PI) in capital budgeting?
(Net Cash Flows / Initial Investment) * (1 + Discount Rate)
ExplanationPI is calculated as the ratio of net cash flows to initial investment, adjusted for the discount rate.
#16
How does the post-audit process contribute to improving capital budgeting decisions?
By evaluating project performance after completion
ExplanationPost-audit assesses actual project performance against projections, offering insights for future decision-making.