Capital Budgeting: Evaluating Investment Opportunities for Business Success

Question 1

Which of the following factors is NOT considered when evaluating the feasibility of a capital budgeting project?

Accepted Answer

Project's impact on the company's stock price

Answer

Project risk

Answer

Project timeline

Answer

Project's impact on the company's market share

Question 2

A project with a negative NPV is generally considered:

Accepted Answer

Unacceptable

Answer

Acceptable

Answer

Marginal

Answer

Indifferent

Question 3

The Payback Period of a project is the time it takes to:

Accepted Answer

Recover the Initial Investment

Answer

Generate the Net Present Value

Answer

Reach the Internal Rate of Return

Answer

Complete the project

Question 4

Sensitivity analysis is primarily used to:

Accepted Answer

Evaluate the impact of changes in assumptions on project outcomes

Answer

Estimate the probability of project success

Answer

Calculate the cost of capital for the project

Answer

Determine the optimal investment strategy

Question 5

A major limitation of the Payback Period method is its:

Accepted Answer

Inability to consider the time value of money

Answer

Overestimation of project profitability

Answer

Lack of applicability to long-term projects

Answer

Complexity of calculation

Question 6

The Net Present Value method provides a more comprehensive evaluation of a project's profitability compared to the Payback Period method because it:

Accepted Answer

Considers the time value of money

Answer

Is easier to calculate

Answer

Provides a more accurate measure of project risk

Answer

Can be used to evaluate projects of different sizes

Question 7

Which of the following is NOT a benefit of capital budgeting techniques?

Accepted Answer

Eliminating risk from investment projects

Answer

Making informed investment decisions

Answer

Maximizing shareholder value

Answer

Evaluating the profitability of investment proposals

Question 8

An investment with an initial cash outlay of $120,000 and annual cash inflows of $30,000 has a payback period of:

Accepted Answer

2 years

Answer

4 years

Answer

5 years

Answer

6 years

Question 9

Which of the following is a strength of the payback period method?

Accepted Answer

Simplicity of calculation

Answer

Consideration of time value of money

Answer

Measurement of investment risk

Answer

Consideration of the entire life of the investment

Question 10

What is the primary purpose of sensitivity analysis in capital budgeting?

Accepted Answer

To assess the impact of changes in assumptions on project outcomes

Answer

To determine the optimal investment size

Answer

To select the most profitable investment alternative

Answer

To calculate the project's break-even point

Question 11

Which factor does NOT influence the calculation of a company's WACC?

Accepted Answer

Inflation rate

Answer

Debt-to-equity ratio

Answer

Cost of debt

Answer

Cost of equity

Question 12

What is the primary objective of capital rationing in capital budgeting?

Accepted Answer

To efficiently allocate limited capital resources

Answer

To ensure the undertaking of all profitable projects

Answer

To maximize shareholder wealth

Answer

To minimize the risk associated with investment proposals

Question 13

Which technique is NOT typically used to evaluate real options in capital budgeting?

Accepted Answer

Discounted cash flow analysis

Answer

Decision tree analysis

Answer

Monte Carlo simulation

Answer

Net present value with growth

Question 14

Which of the following methods is NOT used in capital budgeting?

Accepted Answer

Discounted Payback Period

Answer

Net Present Value

Answer

Internal Rate of Return

Answer

Payback Period

Question 15

What is the primary goal of capital budgeting?

Accepted Answer

Maximizing shareholder value

Answer

Increasing short-term profits

Answer

Reducing operating costs

Answer

Minimizing investment risk

Question 16

Which of the following factors is NOT considered when evaluating a capital investment?

Accepted Answer

Employee morale

Answer

Initial investment cost

Answer

Expected cash flows

Answer

Return on investment

Question 17

What does a positive Net Present Value (NPV) indicate?

Accepted Answer

The investment is expected to generate positive cash flows

Answer

The investment is expected to generate negative cash flows

Answer

The investment will break even

Answer

The investment is too risky

Question 18

What is the payback period of an investment?

Accepted Answer

The amount of time it takes to recover the initial investment

Answer

The total amount of cash flows generated by the investment

Answer

The rate of return on the investment

Answer

The risk associated with the investment

Question 19

Which of the following investments would be considered more risky?

Accepted Answer

An investment in a start-up company

Answer

An investment in a stable, well-established company

Answer

An investment in a government bond

Answer

An investment in real estate

Question 20

What is the role of a financial manager in capital budgeting?

Accepted Answer

To evaluate and make investment decisions

Answer

To prepare financial statements

Answer

To manage cash flow

Answer

To provide customer service

Question 21

Which approach to incorporating sustainability factors into capital budgeting is most effective?

Accepted Answer

Fully integrating sustainability factors into capital budgeting decisions

Answer

Ignoring sustainability factors

Answer

Considering sustainability factors only when they have a clear financial benefit

Question 22

How does the proportion of debt financing in a firm's capital structure affect its weighted average cost of capital (WACC)?

Accepted Answer

A higher proportion of debt financing generally leads to a higher WACC.

Answer

A higher proportion of equity financing consistently leads to a lower WACC.

Answer

The capital structure does not affect the WACC of a firm.

Answer

A lower proportion of debt financing usually results in a higher WACC.

Question 23

Which of the following is a qualitative technique used in capital budgeting?

Accepted Answer

Sensitivity Analysis

Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Payback Period

Question 24

Which of the following is **not** a primary factor in evaluating capital budgeting proposals?

Accepted Answer

Company's environmental sustainability goals

Answer

Initial cost of the project

Answer

Expected profitability of the project

Answer

Impact of the project on the company's cash flow

Question 25

How does the net present value (NPV) method differ from the internal rate of return (IRR) method?

Accepted Answer

NPV explicitly considers the time value of money, while IRR does not.

Answer

NPV is only applicable to long-term projects, whereas IRR can be used for any project.

Answer

IRR is always higher than NPV.

Question 26

Which assumption forms the basis of the payback period method for capital budgeting?

Accepted Answer

Project cash flows occur evenly throughout the project's life.

Answer

The project's discount rate is zero.

Answer

The project has an infinite lifespan.

Question 27

What is the formula used to calculate the profitability index (PI) for a capital budgeting project?

Accepted Answer

PI = Present value of future cash inflows / Present value of initial cash outflows

Answer

PI = Payback period / Profit margin

Answer

PI = Internal rate of return / Net present value

Question 28

What is the primary objective of conducting a sensitivity analysis in capital budgeting?

Accepted Answer

To determine how changes in key assumptions affect the project's NPV.

Answer

To calculate the project's internal rate of return.

Answer

To identify the project with the shortest payback period.

Question 29

Which of the following qualitative factors should be considered during the evaluation of capital budgeting projects?

Accepted Answer

Environmental impact

Answer

Internal rate of return

Answer

Net present value

Answer

Payback period

Question 30

What is the formula for calculating the internal rate of return (IRR) for capital budgeting?

Accepted Answer

IRR = Discount rate that equates the present value of future cash inflows to the present value of initial cash outflows

Answer

IRR = Net present value / Initial investment

Answer

IRR = Payback period / Profit margin

Question 31

Which of the following is NOT a factor that affects the internal rate of return (IRR) of a project?

Accepted Answer

Inflation

Answer

Project life

Answer

Cash flows

Answer

Initial investment

Question 32

Which of the following qualitative factors should be considered when evaluating a capital budgeting project?

Accepted Answer

Market demand

Answer

Net present value

Answer

Payback period

Answer

Internal rate of return

Question 33

Which of the following is a limitation of the payback period method?

Accepted Answer

It does not consider the time value of money.

Answer

It is easy to calculate.

Answer

It provides a quick estimate of the project's liquidity.

Question 34

Which of the following is **NOT** a commonly used capital budgeting technique?

Accepted Answer

Variance Analysis

Answer

Internal Rate of Return (IRR)

Answer

Payback Period

Answer

Net Present Value (NPV)

Question 35

A project with a negative NPV should be:

Accepted Answer

Rejected

Answer

Deferred

Answer

Accepted

Question 36

The internal rate of return (IRR) is the discount rate that makes the net present value of a project equal to:

Accepted Answer

Zero

Answer

One

Answer

The initial investment

Question 37

Which of the following is a limitation of the payback period method?

Accepted Answer

It ignores the time value of money.

Answer

It is easy to calculate.

Answer

It can be used to compare projects with different lives.

Answer

It provides a quick estimate of the project's liquidity.

Question 38

A project with an IRR of 12% and a required rate of return of 10% should be:

Accepted Answer

Accepted

Answer

Deferred

Answer

Re-evaluated

Answer

Rejected

Question 39

The net present value of a project is the:

Accepted Answer

Sum of the present values of the project's future cash inflows minus the initial investment

Answer

Cash outflows minus cash inflows

Answer

Initial investment plus annual cash flows

Answer

Annual cash flows minus depreciation

Question 40

Which of the following is a qualitative factor that should be considered in capital budgeting?

Accepted Answer

Management's assessment of the project's strategic fit

Answer

The project's payback period

Answer

The project's internal rate of return

Question 41

Which capital budgeting method takes into account the time value of money?

Accepted Answer

Net Present Value (NPV)

Answer

Payback Period

Answer

Accounting Rate of Return

Answer

Profitability Index

Question 42

Which of the following is NOT a common method used in capital budgeting?

Accepted Answer

Break-Even Analysis

Answer

Payback Period

Answer

Internal Rate of Return

Answer

Net Present Value

Question 43

What is the definition of the payback period?

Accepted Answer

The number of years it takes to recover the initial investment of a project.

Answer

The total amount of cash flows generated by a project.

Answer

The rate of return on an investment.

Question 44

What is the key difference between mutually exclusive and independent projects?

Accepted Answer

Mutually exclusive projects compete for the same resources, while independent projects do not.

Answer

Independent projects are always more profitable than mutually exclusive projects.

Answer

Mutually exclusive projects have higher risk than independent projects.

Question 45

What is the purpose of sensitivity analysis in capital budgeting?

Accepted Answer

To evaluate the impact of changes in assumptions on project outcomes.

Answer

To eliminate risk from capital budgeting decisions.

Answer

To provide a precise forecast of future cash flows.

Question 46

Which of the following is a qualitative factor that should be considered in capital budgeting?

Accepted Answer

Strategic fit

Answer

Discount rate

Answer

Expected cash flows

Answer

Initial investment

Question 47

Which of the following is NOT a factor to consider when evaluating a capital investment proposal?

Accepted Answer

Current stock price

Answer

Risk

Answer

Cost of capital

Answer

Cash flows

Question 48

The net present value (NPV) of an investment is the sum of its:

Accepted Answer

Discounted future cash flows

Answer

Initial investment and operating cash flows

Answer

Cost of capital and payback period

Answer

Future cash flows and terminal value

Question 49

Which of the following is NOT an advantage of using the internal rate of return (IRR) method?

Accepted Answer

It is a more complex calculation than NPV.

Answer

It considers the time value of money.

Answer

It can be used to rank investment proposals.

Answer

It provides a measure of the profitability of an investment.

Question 50

The payback period is the time it takes for an investment to:

Accepted Answer

Generate enough cash flow to cover its initial investment

Answer

Reach its maximum profitability

Answer

Generate a positive net present value

Question 51

Which of the following is a qualitative factor that should be considered when evaluating a capital investment proposal?

Accepted Answer

Strategic fit

Answer

Payback period

Answer

Internal rate of return

Answer

Net present value

Question 52

The cost of capital is the:

Accepted Answer

Minimum rate of return required by investors

Answer

Interest rate on a loan

Answer

Return on equity

Answer

Amount of money needed to finance an investment

Question 53

Which of the following is the most important factor to consider when evaluating a capital investment proposal?

Accepted Answer

The expected return

Answer

The payback period

Answer

The initial investment

Answer

The risk

Question 54

Capital budgeting techniques can be used to evaluate investments in:

Accepted Answer

All of the above

Answer

New product development

Answer

Equipment

Answer

Buildings