Capital Budgeting Techniques: Master the Fundamentals for Investment Success

Question 1

What is the implication of a positive net present value (NPV) for a project?

Accepted Answer

The project is expected to yield a return that exceeds the cost of capital.

Answer

The project is expected to yield a return that is less than the cost of capital.

Answer

The project is expected to break even.

Answer

The project is not financially viable.

Question 2

What does a payback period of 3 years for a project signify?

Accepted Answer

The project will take 3 years to generate sufficient cash flow to cover the initial investment.

Answer

The project will generate a return on investment within 3 years.

Answer

The project will break even within 3 years.

Answer

The project is not financially viable.

Question 3

If a project's IRR is 15% and the cost of capital is 10%, what can be concluded about the project's NPV?

Accepted Answer

It is positive.

Answer

It is negative.

Answer

It is zero.

Answer

It cannot be determined.

Question 4

NPV is calculated by determining the present value of all future cash flows and subtracting the:

Accepted Answer

Initial investment

Answer

Total cost of the project

Answer

Net income

Answer

Operating expenses

Question 5

A project with an NPV greater than zero and an IRR less than the company's cost of capital should be:

Accepted Answer

Further evaluated

Answer

Accepted

Answer

Rejected

Answer

Re-calculated

Question 6

The capital budgeting technique that is most appropriate for evaluating long-term investments with uncertain cash flows is:

Accepted Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Payback Period

Answer

Discounted Payback Period

Question 7

In the context of capital budgeting, which of the following statements is true?

Accepted Answer

The goal is to maximize shareholder wealth

Answer

The techniques used are precise and always lead to optimal decisions

Answer

The estimates and assumptions used are always accurate

Answer

The results are not influenced by management's biases

Question 8

How does the time value of money affect the choice of capital budgeting techniques?

Accepted Answer

It highlights the importance of considering the changing value of money over time, which affects the present value of future cash flows.

Answer

It eliminates the need to discount future cash flows because they are assumed to have equal value.

Answer

It only applies to long-term investments because the impact on short-term investments is considered insignificant.

Answer

It is irrelevant in capital budgeting because these techniques focus solely on the initial investment cost.

Question 9

Which of the following statements about the Internal Rate of Return (IRR) method is correct? The IRR is the discount rate that makes the NPV of a project equal to zero.

Accepted Answer

The IRR is the discount rate that makes the NPV of a project equal to zero.

Answer

The IRR is always higher than the NPV.

Answer

The IRR can be used to compare projects with different cash flow patterns.

Answer

The IRR is always a positive value.

Question 10

A project has an IRR of 12%. If the required rate of return is 10%, should the project be accepted?

Accepted Answer

Yes, because the IRR is higher than the required rate of return.

Answer

No, because the IRR is lower than the required rate of return.

Answer

It depends on the project's payback period.

Answer

It depends on the project's NPV.

Question 11

Which of the following is an advantage of the Payback Period method? It is easy to understand and calculate.

Accepted Answer

It is easy to understand and calculate.

Answer

It considers the time value of money.

Answer

It can be used to compare projects with different cash flow patterns.

Answer

It is always the most accurate capital budgeting technique.

Question 12

Which capital budgeting technique explicitly accounts for the time value of money by considering all cash flows over the project's life and discounting them back to the present?

Accepted Answer

Net Present Value (NPV)

Answer

Payback Period

Answer

Internal Rate of Return (IRR)

Answer

Modified Internal Rate of Return (MIRR)

Question 13

Which capital budgeting technique calculates the discount rate that makes the net present value of the project's cash flows equal to zero?

Accepted Answer

Internal Rate of Return (IRR)

Answer

Payback Period

Answer

Benefit-Cost Ratio

Answer

Net Present Value (NPV)

Question 14

Which capital budgeting technique measures the length of time required to recover the initial investment?

Accepted Answer

Payback Period

Answer

Profitability Index

Answer

Internal Rate of Return (IRR)

Answer

Net Present Value (NPV)

Question 15

Which of the following is an example of a qualitative factor that may influence capital budgeting decisions?

Accepted Answer

Market demand

Answer

Net present value

Answer

Payback period

Answer

Internal rate of return

Question 16

In NPV analysis, what is the primary decision criterion for accepting or rejecting projects?

Accepted Answer

Accept projects with positive NPVs

Answer

Accept projects with payback periods less than the project's life

Answer

Accept projects with negative NPVs

Answer

Accept projects with IRRs greater than the discount rate

Question 17

A project has the following cash flows: $2,000 in Year 1, $5,000 in Year 2, and $3,000 in Year 3. What is the project's payback period?

Accepted Answer

1.33 years

Answer

2.00 years

Answer

3.00 years

Answer

2.67 years