Capital Budgeting: Evaluating Investment Decisions for Success

Question 1

Which of the following is NOT a method commonly used to evaluate capital investment proposals?

Accepted Answer

Return on Equity (ROE)

Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Payback Period

Question 2

The payback period refers to the:

Accepted Answer

Number of years it takes to recover the initial investment

Answer

Percentage of return on investment achieved each year

Answer

Present value of all future cash flows

Answer

Discount rate used in NPV calculations

Question 3

A sunk cost is characterized by:

Accepted Answer

Being a past expense that cannot be recovered

Answer

Being an expense that is incurred on a regular basis

Answer

Being an expense that can be avoided

Answer

Being an expense that is directly related to production

Question 4

Which of the following is a fundamental assumption of the time value of money?

Accepted Answer

Money available today is worth more than an equivalent sum in the future.

Answer

Interest rates remain unchanged throughout the relevant time period.

Answer

Inflation has no bearing on the time value of money.

Answer

Investment risk does not influence its present value.

Question 5

Which of the following methods is used to calculate the present value of future cash flows in capital budgeting?

Accepted Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Payback Period

Answer

Break-Even Point

Question 6

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

Accepted Answer

The investment is expected to generate a return greater than the cost of capital

Answer

The investment is expected to generate a return less than the cost of capital

Answer

The investment is expected to break even

Answer

The investment is not viable

Question 7

Which of the following is NOT a component of the Internal Rate of Return (IRR) calculation?

Accepted Answer

Depreciation

Answer

Initial investment

Answer

Future cash inflows

Answer

Discount rate

Question 8

What is the primary purpose of the payback period method in capital budgeting?

Accepted Answer

To determine how long it will take to recover the initial investment

Answer

To calculate the rate of return on the investment

Answer

To identify the Net Present Value (NPV) of the investment

Answer

To determine the riskiness of the investment

Question 9

The formula for calculating the Net Present Value (NPV) of a project is:

Accepted Answer

NPV = Present Value of Future Cash Flows - Initial Investment

Answer

NPV = Initial Investment + Present Value of Future Cash Flows

Answer

NPV = Initial Investment - Present Value of Future Cash Flows

Answer

NPV = Future Cash Flows - Initial Investment

Question 10

The primary purpose of capital budgeting is to:

Accepted Answer

Evaluate the financial viability of proposed investments

Answer

Prioritize investment projects based on expected returns

Answer

Ensure that companies have sufficient funds for all their projects

Answer

Determine the cost of a company's capital

Question 11

Incremental cash flows, in the context of capital budgeting, represent:

Accepted Answer

The additional cash flows that are generated by a proposed investment, assuming it is undertaken.

Answer

The cash flows that are lost if a proposed investment is not undertaken.

Answer

The difference between the initial investment and the future cash flows.

Answer

The total amount of cash that will be generated by a project.

Question 12

The typical cut-off rate used when evaluating capital projects is:

Accepted Answer

The company's weighted average cost of capital

Answer

0%

Answer

The project's estimated rate of return

Answer

The industry average rate of return

Question 13

The Net Present Value (NPV) is calculated by:

Accepted Answer

Discounting future cash flows at a given rate

Answer

Comparing the initial investment to the total cash flows

Answer

Calculating the average return over the life of the project

Answer

Dividing the annual cash flow by the initial investment

Question 14

The Internal Rate of Return (IRR) represents:

Accepted Answer

The discount rate at which NPV is equal to zero

Answer

The average annual return on the investment

Answer

The number of years it takes to recoup the initial investment

Answer

The total amount of cash flow generated over the life of the project

Question 15

The Payback Period measures:

Accepted Answer

The time it takes to generate enough cash flow to cover the initial investment

Answer

The profitability of the investment over its lifetime

Answer

The risk associated with the investment

Answer

The return on equity for the shareholders

Question 16

Which of the following factors should NOT be considered when selecting an appropriate capital budgeting technique?

Accepted Answer

Company's risk appetite

Answer

Project size and complexity

Answer

Availability of data

Answer

Investment horizon

Question 17

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

Accepted Answer

Reduced sales volume

Answer

Improved financial performance

Answer

Increased stakeholder confidence

Answer

Enhanced decision-making

Question 18

What is the primary objective of the net present value (NPV) method?

Accepted Answer

To determine the present value of future cash flows

Answer

To calculate the average return on investment

Answer

To estimate the payback period

Question 19

Which of the following factors are considered in capital budgeting?

Accepted Answer

All of the options provided

Answer

Net present value

Answer

Payback period

Answer

Internal rate of return

Question 20

What is the key distinction between a capital expenditure and an operating expenditure?

Accepted Answer

Capital expenditures are long-term investments; operating expenditures are short-term expenses

Answer

Capital expenditures are incurred regularly; operating expenditures are incurred infrequently

Answer

Capital expenditures are tax deductible; operating expenditures are not

Question 21

What is the purpose of performing a sensitivity analysis in capital budgeting?

Accepted Answer

To assess the impact of changes in assumptions on the project's performance

Answer

To identify the most profitable investment option

Answer

To estimate the project's risk

Question 22

Which of the following is a qualitative factor that influences capital budgeting decisions?

Accepted Answer

Market demand

Answer

Net present value

Answer

Internal rate of return

Question 23

What is the significance of risk assessment in capital budgeting?

Accepted Answer

To identify potential threats to the project's success

Answer

To eliminate all risk from the project

Answer

To guarantee the project's profitability

Question 24

Which technique can be used to evaluate capital investment proposals in the presence of uncertain future conditions?

Accepted Answer

Real options analysis

Answer

Net present value (NPV)

Answer

Internal rate of return (IRR)

Answer

Payback period