Capital Budgeting Quizzes: Master Investment Appraisal Techniques

Question 1

Which of the following is **not** a primary factor to consider when evaluating a capital investment project?

Accepted Answer

Environmental impact of the project

Answer

Initial investment cost

Answer

Projected future cash flows

Answer

Return on investment (ROI)

Question 2

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

Accepted Answer

Earnings per share

Answer

Payback period

Answer

Net present value

Answer

Internal rate of return

Question 3

What is the fundamental difference between a sinking fund and a depreciation fund?

Accepted Answer

A sinking fund accumulates funds for future debt repayment, while a depreciation fund is used to finance asset replacement

Answer

A depreciation fund accumulates funds for future debt repayment, while a sinking fund is used to finance asset replacement

Answer

A sinking fund is used to cover unexpected expenses, while a depreciation fund is used to replace assets

Answer

A depreciation fund is used to cover unexpected expenses, while a sinking fund is used to repay debt

Question 4

A project with a positive NPV and an IRR greater than the discount rate is generally considered:

Accepted Answer

Financially acceptable for investment

Answer

Unacceptable for investment

Answer

Need further analysis

Answer

Cannot be determined

Question 5

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

Accepted Answer

Capital expenditures are long-term investments, while operating expenditures are short-term expenses

Answer

Operating expenditures are long-term investments, while capital expenditures are short-term expenses

Answer

Both are long-term investments

Answer

Both are short-term expenses

Question 6

Which of the following is the primary goal of capital budgeting?

Accepted Answer

Maximize shareholder wealth

Answer

Minimize risk

Answer

Increase sales revenue

Answer

Reduce operating costs

Question 7

Which of the following is NOT a **qualitative** factor to consider in capital budgeting?

Accepted Answer

Return on investment

Answer

Market size

Answer

Technological advancements

Answer

Environmental impact

Question 8

What is the primary purpose of a cash flow forecast in capital budgeting?

Accepted Answer

To predict future revenues and expenses associated with a project

Answer

To estimate the required rate of return

Answer

To calculate the payback period

Answer

To determine the project's profitability index

Question 9

What is the payback period?

Accepted Answer

The time required for a project to generate enough cash flow to cover its initial investment

Answer

The rate at which a project's cash flows are discounted

Answer

The present value of a project's future cash flows

Answer

The ratio of a project's NPV to its initial investment

Question 10

Define the Internal Rate of Return (IRR) and provide its formula.

Accepted Answer

The discount rate that makes the Net Present Value (NPV) of a project equal to zero. Formula: IRR = Discount rate that equates NPV to zero

Answer

The percentage return on an investment

Answer

The payback period of an investment

Question 11

What is the significance of a Net Present Value (NPV) analysis?

Accepted Answer

To determine the present value of future cash flows, evaluate investment profitability, and make informed decisions

Answer

To identify the payback period of an investment

Answer

To estimate the total cost of an investment project

Question 12

List the key factors that should be considered when assessing the risk associated with an investment project.

Accepted Answer

Economic conditions, industry trends, project-specific risks (e.g., technological uncertainties, regulatory changes)

Answer

Project duration only

Answer

Size of the investment only

Question 13

Distinguish between capital expenditures and operating expenses, providing specific examples of each.

Accepted Answer

Capital expenditures: Long-term investments that benefit multiple periods (e.g., machinery, buildings). Operating expenses: Short-term costs incurred in the day-to-day operations (e.g., rent, salaries)

Answer

Capital expenditures have a higher impact on profitability than operating expenses

Answer

Capital expenditures are expensed in the income statement, while operating expenses are capitalized on the balance sheet

Question 14

Describe the methods that can be employed to calculate the Internal Rate of Return (IRR).

Accepted Answer

Trial and error, financial calculator, spreadsheet software (e.g., Excel)

Answer

Calculating the NPV at a specific discount rate

Answer

Using the payback period

Question 15

Define the payback period of an investment project and explain its significance.

Accepted Answer

The number of years required to recover the initial investment, indicating the liquidity of an investment

Answer

The discount rate used to calculate the NPV

Answer

The total expected life of the investment project

Question 16

Provide an example of an intangible benefit that may be considered in capital budgeting and explain its potential impact.

Accepted Answer

Enhanced brand reputation: Improved brand image can lead to increased customer loyalty, sales, and long-term profitability

Answer

Purchase of new equipment

Answer

Increased sales revenue

Answer

Reduction in production costs

Question 17

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

Accepted Answer

To determine how changes in key input variables affect investment outcomes.

Answer

To eliminate all uncertainty related to future cash flows.

Answer

To identify the most profitable investment opportunity.

Answer

To establish the minimum acceptable return for an investment.

Question 18

A company invests £100,000 in new equipment with a 5-year lifespan. This equipment is expected to generate £30,000 in annual cash inflows. What is the payback period for this investment?

Accepted Answer

3.33 years

Answer

5.0 years

Answer

4.0 years

Answer

2.5 years

Question 19

Two mutually exclusive projects are being considered: Project A has a higher NPV than Project B, but Project B has a shorter payback period. Which project should the company prioritize?

Accepted Answer

Project A, as it has a higher NPV, indicating greater long-term profitability.

Answer

Either project, as both offer potential profitability.

Answer

Neither project, as they are mutually exclusive and only one can be chosen.

Answer

Project B, as its shorter payback period suggests quicker capital recovery.

Question 20

In a discounted cash flow (DCF) analysis, what is the discount rate that results in a project's NPV being zero?

Accepted Answer

Internal Rate of Return (IRR)

Answer

Cost of Capital

Answer

Hurdle Rate

Answer

Risk-Free Rate

Question 21

What is a key drawback of the payback period method for evaluating capital projects?

Accepted Answer

It ignores cash flows occurring after the payback period.

Answer

It accounts for the time value of money.

Answer

It is relatively simple to calculate.

Question 22

A project exhibits a high IRR but a low NPV. What is the most probable reason for this discrepancy?

Accepted Answer

The project generates significant cash flows in later years, which are heavily discounted due to the time value of money.

Answer

The project carries a high level of risk.

Answer

The company's cost of capital is exceptionally low.

Question 23

What is a fundamental assumption underlying sensitivity analysis in capital budgeting?

Accepted Answer

All variables except the one being analyzed remain constant during the analysis.

Answer

All variables are independent of each other.

Answer

The analysis takes into account the time value of money.

Question 24

What is the primary purpose of a post-audit in the context of capital budgeting?

Accepted Answer

To compare a project's actual performance with its planned performance.

Answer

To calculate the project's IRR.

Answer

To determine the project's payback period.

Question 25

A company is considering a project requiring an initial investment of £500,000 with expected annual cash inflows of £150,000 for five years. The company's cost of capital is 10%. What is the NPV of this project?

Accepted Answer

£105,947

Answer

£750,000

Answer

£500,000

Answer

£1,000,000

Question 26

A company is considering investing in a new piece of equipment. The equipment costs £100,000 and is expected to generate annual cash flows of £25,000 for the next 5 years. What is the payback period for this investment?

Accepted Answer

4 years

Answer

10 years

Answer

2.5 years

Answer

5 years

Question 27

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

Accepted Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Payback Period

Answer

Accounting Rate of Return (ARR)

Question 28

Which of the following best describes the Internal Rate of Return (IRR)?

Accepted Answer

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

Answer

The rate of return earned on an investment

Answer

The time it takes for an investment to generate enough cash flow to recover the initial investment

Question 29

A company is considering two mutually exclusive projects. Project A has an NPV of £10,000 and an IRR of 15%. Project B has an NPV of £8,000 and an IRR of 18%. Which project should the company choose?

Accepted Answer

Project A

Answer

Neither project should be chosen

Answer

Both projects are equally good

Answer

Project B

Question 30

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

Accepted Answer

To assess the impact of changes in key variables on a project's profitability

Answer

To calculate the IRR of a project

Answer

To determine the payback period of a project

Question 31

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

Accepted Answer

Company's marketing strategy

Answer

Discount rate

Answer

Initial investment cost

Answer

Expected cash flows

Question 32

A company is considering a project with a high degree of uncertainty. Which capital budgeting technique is most appropriate in this scenario?

Accepted Answer

Scenario analysis

Answer

Accounting rate of return

Answer

Payback period

Answer

Internal rate of return

Question 33

What is the main difference between a replacement decision and an expansion decision in capital budgeting?

Accepted Answer

Replacement decisions involve replacing existing assets, while expansion decisions involve adding new assets

Answer

Replacement decisions are more complex than expansion decisions

Question 34

A company is considering investing in a new project. The project has a high initial investment but is expected to generate significant cash flows in the future. Which capital budgeting technique would be most appropriate for evaluating this project?

Accepted Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Accounting Rate of Return (ARR)

Answer

Payback Period

Question 35

A company is considering investing in a new piece of equipment that costs £100,000. The equipment is expected to generate annual cash flows of £25,000 for the next 5 years. What is the payback period for this investment?

Accepted Answer

4 years

Answer

5 years

Answer

10 years

Answer

2 years

Question 36

Which of the following capital budgeting methods considers the time value of money?

Accepted Answer

Net Present Value (NPV)

Answer

Payback Period

Answer

Accounting Rate of Return (ARR)

Question 37

A company is considering two mutually exclusive projects. Project A has an NPV of £50,000 and a payback period of 3 years. Project B has an NPV of £40,000 and a payback period of 2 years. Which project should the company choose based on the NPV criterion?

Accepted Answer

Project A

Answer

Both projects

Answer

Project B

Answer

Neither project

Question 38

What is the discount rate that equates the present value of an investment's future cash flows to its initial cost?

Accepted Answer

Internal Rate of Return (IRR)

Answer

Net Present Value (NPV)

Answer

Payback Period

Answer

Profitability Index (PI)

Question 39

Which of the following is NOT a factor that can influence the risk and uncertainty associated with a capital budgeting project?

Accepted Answer

The company's dividend policy

Answer

Technological advancements

Answer

Economic conditions

Answer

Competition

Question 40

A company is considering a project with an IRR of 15%. The company's cost of capital is 12%. What is the decision that should be made regarding this project?

Accepted Answer

Accept the project

Answer

Need more information

Answer

Indifferent

Answer

Reject the project

Question 41

What is the primary goal of capital budgeting?

Accepted Answer

Maximize shareholder wealth

Answer

Increase sales revenue

Answer

Minimize costs

Answer

Improve employee morale

Question 42

Which of the following is an example of a capital budgeting project?

Accepted Answer

Purchasing a new factory

Answer

Paying monthly utilities

Answer

Hiring new employees

Answer

Issuing new shares of stock

Question 43

A company is considering a project that requires an initial investment of £500,000. The project is expected to generate annual cash flows of £150,000 for the next 5 years. What is the project's profitability index (PI)?

Accepted Answer

1.50

Answer

1.00

Answer

0.50

Answer

2.00