#1
Which of the following is a primary method used in capital budgeting decisions?
Payback period
ExplanationMeasures the time required to recover initial investment.
#2
What does the term 'discount rate' refer to in capital budgeting?
The interest rate at which future cash flows are discounted
ExplanationRate used to discount future cash flows to present value.
#3
Which capital budgeting technique focuses on the time required to recover the initial investment?
Payback period
ExplanationEmphasizes time taken to recoup initial investment.
#4
Which of the following factors is NOT considered in the Net Present Value (NPV) method?
Project duration
ExplanationDuration of project doesn't directly impact NPV calculation.
#5
What does the profitability index method indicate?
The relative profitability of a project compared to others
ExplanationCompares profitability of projects based on investment.
#6
What is the key assumption underlying the Net Present Value (NPV) method in capital budgeting?
All cash flows are reinvested at the project's discount rate
ExplanationAssumes reinvestment of cash flows at specified rate.
#7
Which of the following is NOT a capital budgeting technique?
Cost of Goods Sold (COGS)
ExplanationCOGS is a financial accounting term, not a capital budgeting technique.
#8
What is the Net Present Value (NPV) method used for in capital budgeting?
To assess a project's profitability
ExplanationEvaluates project's profitability by discounting cash flows.
#9
Which of the following factors is NOT considered in capital budgeting decisions?
Market competition
ExplanationExternal market dynamics are not directly factored in.
#10
What is the Internal Rate of Return (IRR) method primarily used for in capital budgeting?
To calculate the rate at which the project's NPV is zero
ExplanationDetermines the rate of return where NPV equals zero.
#11
What is the formula for calculating the Payback Period?
Initial Investment / Annual Cash Flow
ExplanationSimple division to determine payback period.
#12
What is the main limitation of the Payback Period method in capital budgeting?
It ignores the time value of money
ExplanationDoesn't consider the value of money over time.
#13
In capital budgeting, what does the term 'mutually exclusive projects' mean?
Projects that cannot be implemented simultaneously
ExplanationProjects that are alternative options for investment.
#14
What is the formula for calculating the Accounting Rate of Return (ARR)?
(Average annual profit / Initial investment) * 100
ExplanationRatio of average profit to initial investment.
#15
In capital budgeting, what does the term 'opportunity cost' refer to?
The potential benefit lost by choosing one investment over another
ExplanationCost of the next best alternative foregone.
#16
What is the main advantage of using the Profitability Index (PI) method in capital budgeting?
It accounts for the time value of money
ExplanationConsiders the value of money over time in investment decisions.
#17
Under which capital budgeting technique would you select a project if its profitability index is greater than 1?
Profitability index method
ExplanationIndicates projects with positive value relative to investment.
#18
Which of the following is an advantage of using the Net Present Value (NPV) method in capital budgeting?
It accounts for the time value of money
ExplanationTakes into account the value of money over time.
#19
Which capital budgeting method is also known as the 'benefit-cost ratio'?
Profitability index method
ExplanationCompares benefits to costs of investment.
#20
Which capital budgeting technique is based on the principle of selecting projects that yield the highest return relative to their investment?
Internal Rate of Return (IRR)
ExplanationFocuses on maximizing return relative to investment.