#1
Which capital budgeting technique does not consider the time value of money?
Payback Period
ExplanationIgnores the time value of money in evaluating investments.
#2
What is the main limitation of the Payback Period method in capital budgeting?
It does not consider the time value of money
ExplanationFails to account for the impact of time on the value of money.
#3
What is the primary advantage of using the Profitability Index (PI) method in capital budgeting?
It accounts for the time value of money
ExplanationConsideration of time value of money in assessing investment profitability.
#4
What is the main drawback of relying solely on the Payback Period method for investment decisions?
It ignores the time value of money
ExplanationNeglects the impact of time on the value of money, leading to incomplete analysis.
#5
What does the term 'capital rationing' mean in the context of capital budgeting?
Restricting the total amount of capital available for investment
ExplanationImposes limits on the overall capital available for investment in various projects.
#6
What does the Net Present Value (NPV) method indicate about an investment project?
Whether the project is profitable
ExplanationDetermines the profitability of the investment by analyzing present value of cash flows.
#7
In capital budgeting, what does the Internal Rate of Return (IRR) represent?
The discount rate that makes the NPV zero
ExplanationIdentifies the discount rate where the project's NPV becomes zero.
#8
Which discount rate is commonly used in the Net Present Value (NPV) method?
Cost of capital
ExplanationUtilizes the cost of capital as the discount rate for present value calculations.
#9
What does a positive Net Present Value (NPV) indicate about an investment project?
The project is profitable
ExplanationA positive NPV suggests the project generates more value than the invested capital.
#10
In capital budgeting, what does the term 'mutually exclusive projects' mean?
Projects that cannot be undertaken simultaneously
ExplanationOptions where choosing one excludes the possibility of pursuing others concurrently.
#11
What is the formula for calculating Payback Period?
Initial Investment / Annual Cash Flow
ExplanationCalculates the time taken to recover the initial investment based on annual cash flows.
#12
Which capital budgeting technique considers the profitability relative to the investment required?
Profitability Index (PI)
ExplanationAssesses profitability in relation to the amount invested, expressed as a ratio.
#13
In the context of capital budgeting, what does the term 'sunk cost' refer to?
Costs already incurred and cannot be recovered
ExplanationExpenses that have been paid and cannot be regained, irrelevant for decision-making.
#14
Which capital budgeting technique is most suitable for evaluating projects with uneven cash flows?
Internal Rate of Return (IRR)
ExplanationWell-suited for projects with irregular cash flow patterns.
#15
What does the Modified Internal Rate of Return (MIRR) address that the Internal Rate of Return (IRR) does not?
Reinvestment rate
ExplanationAccounts for the rate at which cash flows are reinvested in the MIRR calculation.