Financial Management and Capital Budgeting Quiz

Market capitalization is a measure of a company's total value in the stock market, not a capital budgeting technique.

WACC represents the average rate of return a company is expected to pay its security holders.

IRR represents the discount rate where the net present value of cash flows equals zero.

Payback period indicates the time required for the project to generate cash flows sufficient to recover the initial investment.

CAPM is used to determine the expected return on an investment based on its risk.

Sunk costs are historical costs that are irrelevant for decision making since they cannot be changed.

Opportunity cost represents the benefit foregone by choosing one alternative over another.

Risk in capital budgeting pertains to the uncertainty or variability in expected cash flows, affecting the project's profitability.

NPV measures the profitability of a project by discounting future cash flows to present value.

IRR calculates the discount rate that makes the net present value of a project's cash flows equal to zero.

Standard deviation measures the dispersion of returns and thus represents the riskiness of a project.

Payback period does not involve discounting cash flows and hence does not consider the time value of money.

Discounted payback period is similar to payback period but involves discounting cash flows at the project's discount rate.

Profitability index measures the present value of future cash flows per unit of initial investment.

Cost of capital is influenced by various factors including risk-free rate, market risk premium, and company-specific factors.

Cost of preference capital is not typically included in WACC calculation since it's a form of equity.

Payback period is calculated by dividing the initial investment by the expected annual cash inflows.

Sensitivity analysis helps identify how changes in variables affect the project's financial metrics, aiding decision-making under uncertainty.

PI greater than 1 indicates that the present value of future cash flows exceeds the initial investment, making the project financially viable.

WACC calculation considers the proportions of debt, equity, and other sources of capital in the company's capital structure.

Payback period does not consider the time value of money or cash flows beyond the payback period.

NPV calculates the present value of future cash flows discounted at a specified rate minus the initial investment.

IRR method can produce multiple rates of return making it difficult to interpret.

Payback period focuses on how quickly the initial investment is recovered, prioritizing liquidity over long-term profitability.

IRR accounts for the timing of cash flows, providing insight into the project's profitability over time.