Capital Budgeting: Evaluating Long-Term Investments for Success

Question 1

In Net Present Value (NPV) analysis, which factor is NOT crucial for evaluating capital budgeting projects?

Accepted Answer

Project's payback period

Answer

Initial investment

Answer

Projected cash flows

Answer

Discount rate

Question 2

Capital rationing refers to the situation where:

Accepted Answer

A company has limited funds for capital projects

Answer

A company prioritizes projects based on profitability

Answer

A company cannot invest in projects with a negative NPV

Answer

A company considers the overall financial impact of projects

Question 3

Which of the following is NOT a qualitative factor considered in capital budgeting?

Accepted Answer

Internal rate of return

Answer

Environmental impact

Answer

Technological uncertainty

Answer

Political risk

Question 4

In capital budgeting, which of the following is a qualitative, non-numerical factor?

Accepted Answer

Alignment with the company's strategic objectives

Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Payback Period

Question 5

The primary objective of capital budgeting is to:

Accepted Answer

Maximize shareholder value

Answer

Minimize investment risk

Answer

Reduce capital costs

Answer

Guarantee profitability of all projects

Question 6

Which of the following is NOT a widely used technique for evaluating capital budgeting projects?

Accepted Answer

Profitability Quotient

Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Payback Period

Question 7

For calculating cash flow from operations, which non-cash expense is added back to net income?

Accepted Answer

Depreciation

Answer

Interest expense

Answer

Rent expense

Answer

Salaries expense

Question 8

Which method is NOT commonly used for evaluating capital budgeting projects?

Accepted Answer

Return on Investment (ROI)

Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Profitability Index (PI)

Question 9

A project with a positive NPV and an IRR of 10% is considered to be:

Accepted Answer

Acceptable

Answer

Unacceptable

Answer

Mutually exclusive

Answer

Independent

Question 10

A project with a positive NPV and a positive IRR is considered to be:

Accepted Answer

Acceptable

Answer

Mutually exclusive

Answer

Independent

Answer

Unacceptable

Question 11

A project with an IRR of 12% and a WACC of 10% is:

Accepted Answer

Acceptable

Answer

Unacceptable

Answer

Mutually exclusive

Answer

Independent

Question 12

A project with a high degree of operating leverage is considered to be:

Accepted Answer

More risky

Answer

Less risky

Answer

Equally risky

Answer

Unrelated to risk

Question 13

Improved: Which of the following is NOT a primary factor to consider in evaluating capital budgeting projects?

Accepted Answer

Improved: Current stock market conditions

Answer

Improved: Initial investment outlay

Answer

Improved: Projected cash inflows and outflows

Answer

Improved: Tax implications

Question 14

Improved: What is the primary purpose of using a discount rate in capital budgeting?

Accepted Answer

Improved: To compare projects with different cash flow patterns, adjusting for the time value of money

Answer

Improved: To hedge against inflation

Answer

Improved: To increase the perceived profitability of projects

Answer

Improved: To simplify project evaluation

Question 15

Improved: Which of the following methods is used to calculate the net present value (NPV) of a project?

Accepted Answer

Improved: Present Value of Future Cash Flows - Initial Investment

Answer

Improved: Future Value of Future Cash Flows + Initial Investment

Answer

Improved: Internal Rate of Return - Payback Period

Answer

Improved: Profitability Index + Return on Investment

Question 16

Improved: What is the key distinction between the internal rate of return (IRR) and the payback period?

Accepted Answer

Improved: IRR considers the time value of money, while payback period does not

Answer

Improved: Payback period considers the time value of money, while IRR does not

Answer

Improved: IRR is a more reliable measure of project profitability than payback period

Answer

Improved: Payback period is a more reliable measure of project profitability than IRR

Question 17

Improved: When using a capital rationing approach, which type of project should be selected first, assuming all else is equal?

Accepted Answer

Improved: The project with the highest NPV

Answer

Improved: The project with the shortest payback period

Answer

Improved: The project with the highest IRR

Answer

Improved: The project with the lowest initial investment

Question 18

Improved: What is the concept of sunk cost and why is it crucial in capital budgeting?

Accepted Answer

Improved: Sunk cost refers to past investments that cannot be recovered and should not be considered in future decisions

Answer

Improved: Sunk cost refers to future investments that are expected to be profitable

Answer

Improved: Sunk cost is irrelevant to capital budgeting and should be ignored

Answer

Improved: Sunk cost should be included in the analysis of all capital budgeting projects

Question 19

What is the primary purpose of using a discount rate in capital budgeting?

Accepted Answer

To adjust future cash flows to their present value

Answer

To calculate the payback period

Answer

To determine the internal rate of return

Answer

To compare alternative investment projects

Question 20

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

Accepted Answer

To examine the impact of changes in input variables on project outcomes

Answer

To identify the most profitable investment project

Answer

To estimate the expected return on an investment

Answer

To determine the appropriate discount rate

Question 21

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

Accepted Answer

To assess the robustness of a project's outcomes under various assumptions

Answer

To calculate the probability of a project's success

Answer

To identify the optimal investment strategy

Answer

To determine the project's payback period

Question 22

The Internal Rate of Return (IRR) of a project is the:

Accepted Answer

Discount rate that equates the NPV of the project to zero

Answer

Expected rate of return on the investment

Answer

Ratio of present value of cash inflows to outflows

Answer

Break-even point of the project

Question 23

The payback period of a project is the:

Accepted Answer

Time required to recover the initial investment

Answer

Time for the project to become profitable

Answer

Discount rate that equates the NPV of the project to zero

Answer

Ratio of present value of cash inflows to outflows

Question 24

Identify the characteristic of a capital budgeting decision that refers to its long-lasting consequences.

Accepted Answer

Involves a commitment that cannot be easily reversed

Answer

Requires a substantial financial investment

Answer

Faces a high level of uncertainty

Answer

Considers the time value of money

Question 25

In the context of NPV calculations, what serves as the discount rate?

Accepted Answer

Weighted average cost of capital

Answer

Payback period

Answer

Profitability index

Answer

Internal rate of return

Question 26

What is the primary purpose of utilizing scenario analysis in capital budgeting?

Accepted Answer

To evaluate the potential impact of various economic conditions

Answer

To determine the project with the highest projected return

Answer

To calculate the payback period of the project

Answer

To identify the internal rate of return for the project

Question 27

A project with a negative net present value should be:

Accepted Answer

Rejected

Answer

Re-evaluated

Answer

Accepted

Question 28

The payback period measures the:

Accepted Answer

Time required to recover the initial investment

Answer

Risk associated with the project

Answer

Profitability of the project

Question 29

Which of the following capital budgeting techniques is considered the most comprehensive and accurate?

Accepted Answer

Net present value

Answer

Internal rate of return

Answer

Payback period

Answer

Profitability index

Question 30

A project with an internal rate of return (IRR) of 15% and a cost of capital of 12% should be:

Accepted Answer

Accepted

Answer

Re-evaluated

Answer

Rejected

Question 31

Which of the following is a key benefit of using discounted cash flow (DCF) techniques in capital budgeting?

Accepted Answer

Considers the time value of money

Answer

Reduces the risk of the project

Answer

Eliminates the impact of inflation

Question 32

A project with a profit index of 0.8 should be:

Accepted Answer

Rejected

Answer

Accepted