Capital Budgeting Techniques: Master Engineering Economics

Question 1

Which of the following is NOT a capital budgeting technique?

Accepted Answer

Return on investment

Answer

Payback period

Answer

Equivalent annual cost

Answer

Internal rate of return

Question 2

Which of the following describes the payback period method of capital budgeting?

Accepted Answer

It measures the time it takes for a project to generate enough cash flow to cover its initial investment.

Answer

It considers the time value of money.

Answer

It is the preferred method for evaluating long-term projects.

Answer

It is a more complex method than the net present value method.

Question 3

Which of the following is a **qualitative** factor to consider when evaluating capital budgeting projects?

Accepted Answer

Project risk

Answer

Net present value

Answer

Internal rate of return

Answer

Payback period

Question 4

In capital budgeting analysis, which of the following is a qualitative factor, rather than a quantitative factor?

Accepted Answer

Sustainability

Answer

Return on investment

Answer

Payback period

Answer

Internal rate of return

Question 5

In capital budgeting, the payback period method:

Accepted Answer

Is a simple method that prioritizes projects with shorter payback periods.

Answer

Considers the time value of money and provides a comprehensive measure of a project's profitability.

Answer

Can effectively rank projects based on their overall economic returns and account for risk factors.

Answer

Is the most widely used capital budgeting technique due to its accuracy and objectivity.

Question 6

Which of the following is not a technique commonly used in capital budgeting?

Accepted Answer

Gross Domestic Product

Answer

Payback Period

Answer

Net Present Value

Answer

Internal Rate of Return

Question 7

Which limitation is commonly associated with using net present value (NPV) for capital budgeting?

Accepted Answer

Requires accurate future cash flow estimates

Answer

Considers the time value of money

Answer

Provides a comprehensive measure of project value

Answer

Can evaluate projects with varying investment lives

Question 8

Which of the following is not a technique used in capital budgeting?

Accepted Answer

Cost-benefit analysis

Answer

Payback period

Answer

Net present value

Answer

Internal rate of return

Question 9

In capital budgeting, which project type is characterized by high uncertainty, ongoing expenses, and lacks a defined lifespan?

Accepted Answer

Research and development

Answer

Equipment acquisition

Answer

Facility expansion

Answer

Machinery replacement

Question 10

Which capital budgeting technique utilizes the time value of money and provides a single value representing the present worth of all future cash flows?

Accepted Answer

Net present value

Answer

Payback period

Answer

Internal rate of return

Answer

Equivalent annual cost

Question 11

For a project with irregular and non-uniform cash flows, which capital budgeting technique is most suitable?

Accepted Answer

Net present value

Answer

Payback period

Answer

Internal rate of return

Answer

Annual equivalent cost

Question 12

Which of the following is a potential drawback of using capital budgeting techniques?

Accepted Answer

Increased project complexity and administrative burden

Answer

Enhanced decision-making and resource allocation

Answer

Reduced risk and uncertainty

Question 13

In capital budgeting analysis, which of the following is **NOT** a relevant cash flow?

Accepted Answer

Sunk costs

Answer

Initial investment

Question 14

In capital budgeting, the primary benefit of sensitivity analysis is its ability to:

Accepted Answer

Identify critical variables that significantly impact project outcomes.

Answer

Eliminate the need for probabilistic analysis.

Answer

Provide a comprehensive assessment of project risk.

Answer

Guarantee the accuracy of capital budgeting decisions.

Question 15

What is the main purpose of scenario analysis in capital budgeting?

Accepted Answer

Identify a range of possible outcomes and their likelihood.

Answer

Calculate the impact of inflation on project cash flows.

Answer

Estimate the scrap value of an asset at the end of its useful life.

Question 16

Which of the following cash flows is NOT included in the Net Present Value (NPV) method for capital budgeting?

Accepted Answer

Sunk costs

Answer

Initial investment

Answer

Operating cash flows

Answer

Terminal cash flow

Question 17

Which capital budgeting technique calculates the yearly equivalent cost of a project, considering both the initial investment and ongoing expenses?

Accepted Answer

Equivalent Annual Cost

Answer

Payback Period

Answer

Benefit-Cost Ratio

Question 18

In Net Present Value (NPV) analysis, what does the discount rate represent?

Accepted Answer

The minimum expected rate of return for investors

Answer

The projected growth rate of project revenue

Answer

The rate of inflation over the project's life

Answer

The project's annual operating expenses

Question 19

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

Accepted Answer

Assess the impact of changes in key project assumptions on its financial performance.

Answer

Determine the optimal capital structure for the project.

Question 20

Which capital budgeting technique ranks projects based on their Profitability Index (PI), providing a direct measure of a project's profitability?

Accepted Answer

Profitability Index

Answer

Net Present Value (NPV)

Answer

Payback Period

Answer

Internal Rate of Return (IRR)

Question 21

In capital budgeting, which step involves comparing the expected project return to the company's required return?

Accepted Answer

Evaluating the project

Answer

Defining the project

Answer

Implementing the project

Question 22

In capital budgeting, what is the primary purpose of sensitivity analysis?

Accepted Answer

Evaluating the impact of uncertainties on project outcomes

Answer

Identifying the most profitable project from multiple options

Answer

Simplifying complex financial calculations

Answer

Eliminating the need for assumptions about future cash flows

Question 23

In capital budgeting, which technique discounts future cash flows to the present using a discount rate to determine a project's net present value?

Accepted Answer

Net present value

Answer

Payback period

Answer

Internal rate of return

Question 24

When evaluating mutually exclusive capital projects, which technique should be used to determine the project with the highest Net Present Value (NPV)?

Accepted Answer

Net Present Value (NPV)

Answer

Payback Period

Answer

Internal Rate of Return (IRR)

Question 25

Which factor is not directly accounted for in the payback period method of capital budgeting?

Accepted Answer

Time value of money

Answer

Initial investment cost

Answer

Cash inflows

Question 26

In capital budgeting, why is sensitivity analysis crucial, and how does it improve project evaluations?

Accepted Answer

Sensitivity analysis reveals how project outcomes change when assumptions and inputs vary.

Answer

Sensitivity analysis is insignificant in capital budgeting, as it doesn't affect project outcomes.

Answer

Sensitivity analysis only identifies the most favorable assumptions, skewing the evaluation.

Answer

Sensitivity analysis is limited to assessing the impact of changing one input variable at a time.

Question 27

The Net Present Value (NPV) technique determines the:

Accepted Answer

Difference between the present value of inflows and outflows

Answer

Future value of all future cash flows

Answer

Payback period of the investment

Answer

Internal rate of return

Question 28

Which of the following is an assumption of the Internal Rate of Return (IRR) method?

Accepted Answer

Cash flows are reinvested at the IRR

Answer

The project has an infinite life

Answer

All cash flows are positive

Answer

The discount rate can be negative

Question 29

The Payback Period method measures the:

Accepted Answer

Time required to recover the initial investment

Answer

Profitability of the project over its lifetime

Answer

Risk associated with the project

Answer

Return on investment

Question 30

A project with a positive NPV is considered to be:

Accepted Answer

Profitable

Answer

Unprofitable

Answer

Break-even

Answer

Risky

Question 31

When evaluating projects with different lifespans, it is recommended to use:

Accepted Answer

Equivalent Annual Cost

Answer

Net Present Value

Answer

Internal Rate of Return

Answer

Payback Period

Question 32

When evaluating a project's cash flows, which of the following should be considered?

Accepted Answer

Both positive and negative cash flows

Answer

Only positive cash flows

Answer

Only negative cash flows

Answer

Only cash flows occurring within the first year of the project

Question 33

The Internal Rate of Return (IRR) of a project is the discount rate at which:

Accepted Answer

The project's NPV is equal to zero

Answer

The project's payback period is the shortest

Answer

The project's profitability index is the highest

Answer

The project's equivalent annual cost is minimized

Question 34

Which of the following is NOT a factor that can affect the cost of capital?

Accepted Answer

Project's location

Answer

Interest rates

Answer

Company's financial risk

Answer

Inflation

Question 35

Which capital budgeting technique involves calculating the average annual return on investment?

Accepted Answer

Internal Rate of Return (IRR)

Answer

Net Present Value (NPV)

Answer

Payback Period

Answer

Discounted Payback Period

Question 36

Which of the following factors is NOT typically considered in capital budgeting?

Accepted Answer

Historical financial performance

Answer

Market demand

Answer

Technological feasibility

Answer

Environmental impact

Question 37

A sensitivity analysis is used to:

Accepted Answer

Assess the impact of changes in assumptions on the financial viability of a project

Answer

Identify the most optimistic scenario for a project

Answer

Determine the break-even point of a project

Answer

Evaluate the risk associated with a project

Question 38

Which of the following factors is NOT a qualitative factor that should be considered in capital budgeting decisions?

Accepted Answer

Return on investment

Answer

Environmental impact

Answer

Government regulations

Answer

Social impact

Question 39

The Net Present Value (NPV) method incorporates which aspects of a project's financial performance in its calculation?

Accepted Answer

Both initial investment and cash flows over the project's life

Answer

Initial investment cost and salvage value only

Answer

Cash flows during the project's life only

Answer

Neither initial investment nor cash flows

Question 40

In which scenario is the Payback Period method most appropriate for evaluating a capital budgeting project?

Accepted Answer

When the project has a short payback period

Answer

When the project has a high level of uncertainty

Answer

When maximizing shareholder wealth is the primary objective

Answer

When the project requires a significant initial investment

Question 41

Which of the following techniques is a commonly used method for conducting sensitivity analysis in capital budgeting?

Accepted Answer

Monte Carlo simulation

Answer

Decision tree analysis

Answer

Break-even analysis

Answer

Regression analysis

Question 42

What is the primary objective of a capital budgeting decision?

Accepted Answer

Maximizing shareholder value

Answer

Minimizing project risk

Answer

Complying with legal requirements

Answer

Reducing project costs

Question 43

Which of the following is an example of an intangible asset?

Accepted Answer

Patent

Answer

Land

Answer

Building

Answer

Machinery

Question 44

The Weighted Average Cost of Capital (WACC) is primarily used to:

Accepted Answer

Determine the appropriate discount rate for evaluating capital budgeting projects

Answer

Calculate the cost of debt financing

Answer

Assess the financial performance of a company

Answer

Forecast future cash flows

Question 45

Which step in the capital budgeting process involves comparing different project alternatives and selecting the one with the most favorable outcome?

Accepted Answer

Evaluate project alternatives

Answer

Generate project ideas

Answer

Implement the chosen project

Answer

Monitor project performance

Question 46

Which of the following techniques is not a traditional method used in capital budgeting?

Accepted Answer

Monte Carlo Simulation

Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Payback Period

Question 47

A project with a payback period shorter than its economic life is typically considered to be:

Accepted Answer

Less risky

Answer

More risky

Answer

Neither more nor less risky

Answer

More profitable

Question 48

Which of the following sensitivity analysis techniques involves varying a single variable while holding others constant?

Accepted Answer

One-way sensitivity analysis

Answer

Two-way sensitivity analysis

Answer

Tornado diagram

Answer

Monte Carlo simulation

Question 49

Which of the following risk assessment methods involves estimating the probability of various possible outcomes?

Accepted Answer

Probability analysis

Answer

Scenario analysis

Answer

Expected value analysis

Answer

Decision tree analysis

Question 50

It's possible to have a project with a positive NPV but a negative IRR. True or False?

Accepted Answer

True

Answer

False

Question 51

Evaluate the strengths and limitations of the Equivalent Annual Cost (EAC) method in capital budgeting. Consider its application, accuracy, and suitability for different project types.

Accepted Answer

Suitable for projects with equal lifespans, simplifies project comparison.

Accepted Answer

Ignores the time value of money, potentially leading to inaccurate investment decisions.

Accepted Answer

Best suited for simple projects with predictable cash flows, may not be appropriate for complex projects.

Answer

Always provides the most accurate evaluation, regardless of project characteristics.

Question 52

How does scenario analysis help decision-makers evaluate projects in uncertain situations?

Accepted Answer

Identifies potential risks and opportunities

Answer

Eliminates uncertainty in project outcomes

Answer

Automates project selection

Answer

Relies solely on historical data

Question 53

The payback period method measures:

Accepted Answer

The time required to recover the initial investment

Answer

The average annual return on investment

Answer

The present value of all future cash flows

Answer

The profitability of an investment over its entire life

Question 54

Which of the following is an assumption underlying the net present value (NPV) method?

Accepted Answer

The discount rate is constant

Answer

Cash flows are received evenly over the project's life

Answer

The project is independent of other investments

Answer

The project generates a positive NPV

Question 55

The internal rate of return (IRR) of an investment is:

Accepted Answer

The discount rate that equates the NPV of the project to zero

Answer

The annual percentage return on investment

Answer

The payback period of the project

Answer

The net present value of the project

Question 56

Which of the following capital budgeting techniques considers both time value of money and risk?

Accepted Answer

Adjusted present value method

Answer

Payback period method

Answer

Profitability index method

Answer

Equivalent annual cost method

Question 57

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

Accepted Answer

To evaluate the impact of changes in input assumptions on the project's financial viability

Answer

To identify the most profitable investment option

Answer

To calculate the discount rate for the project

Answer

To determine the payback period of the project

Question 58

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

Accepted Answer

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

Answer

Independent projects have a positive net present value, while mutually exclusive projects do not.

Answer

Mutually exclusive projects have a higher payback period than independent projects.

Answer

Independent projects have a higher internal rate of return than mutually exclusive projects.

Question 59

Which of the following is NOT a relevant factor to consider when evaluating capital budgeting projects?

Accepted Answer

Political stability of the region where the project will be implemented

Answer

Return on investment

Answer

Project risk

Answer

Project duration

Question 60

A company is considering a project with the following cash flows:
Year: 0 1 2 3 4
Cash Flow: -£100,000 £30,000 £40,000 £50,000 £60,000
If the cost of capital is 10% and the reinvestment rate is 12%, what is the Modified Internal Rate of Return (MIRR) of the project?

Accepted Answer

11.5%

Answer

14%

Answer

10%

Answer

12.5%

Question 61

A project has an initial investment of £100,000 and is expected to generate annual cash flows of £25,000 for the next 5 years. Assuming a discount rate of 10%, what is the net present value (NPV) of the project?

Accepted Answer

£74,622

Answer

£122,000

Answer

-£25,378

Answer

£53,746

Question 62

Which of the following is a potential drawback of using the payback period as a capital budgeting technique?

Accepted Answer

It does not consider the time value of money.

Answer

It is easy to calculate.

Answer

It provides insights into the project's cash flow.

Question 63

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

Accepted Answer

Zero

Answer

Negative

Answer

Positive

Answer

Infinity

Question 64

Which of the following factors should NOT be considered when evaluating the economic viability of an engineering project?

Accepted Answer

Political stability of the project's location

Answer

Discount rate

Answer

Expected cash flows

Answer

Initial investment costs