#1
Which of the following is a capital budgeting technique that considers the time value of money?
Net present value (NPV)
ExplanationNPV accounts for the time value of money in evaluating investment projects.
#2
What does the payback period measure?
The time it takes to recover the initial investment
ExplanationPayback period measures the duration required to recoup the initial investment.
#3
Which of the following capital budgeting techniques does not consider the time value of money?
Payback period
ExplanationPayback period does not consider the time value of money.
#4
What does the internal rate of return (IRR) represent?
The discount rate that makes the net present value (NPV) of an investment zero
ExplanationIRR is the discount rate yielding zero NPV for an investment.
#5
What is the primary disadvantage of using the payback period as a capital budgeting technique?
It ignores the time value of money
ExplanationPayback period neglects the time value of money in its assessment.
#6
Which capital budgeting technique is based on the accounting net income rather than cash flows?
Accounting rate of return (ARR)
ExplanationARR relies on accounting net income instead of cash flows.
#7
What does the profitability index (PI) measure?
The efficiency of an investment in generating value per unit of investment
ExplanationPI measures investment efficiency in generating value per unit of investment.
#8
Which of the following is a non-discounted cash flow method used in capital budgeting?
Payback period
ExplanationPayback period is a non-discounted cash flow method in capital budgeting.
#9
Which of the following statements regarding the net present value (NPV) is correct?
A positive NPV indicates that the project's rate of return exceeds the required rate of return
ExplanationPositive NPV signifies the project's return exceeding the required rate.
#10
What does the profitability index (PI) indicate in capital budgeting?
The ratio of net present value to initial investment
ExplanationPI represents the ratio of NPV to the initial investment.
#11
Which of the following is a limitation of the internal rate of return (IRR)?
It can result in multiple IRRs in certain situations
ExplanationIRR may lead to multiple rates of return in specific scenarios.
#12
What is the main purpose of sensitivity analysis in capital budgeting?
To measure the impact of changes in key variables on project profitability
ExplanationSensitivity analysis gauges the effect of variable changes on project profitability.
#13
Under what circumstances can the internal rate of return (IRR) method fail to provide a reliable investment decision?
When the project's cash flows change sign multiple times
ExplanationIRR may fail when project cash flows change sign multiple times.
#14
Which of the following is true regarding the profitability index (PI)?
A PI greater than 1 indicates a financially viable investment
ExplanationPI greater than 1 signifies a financially viable investment.