Capital Budgeting Applications: Master Investment Decision-Making

Question 1

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

Accepted Answer

Elimination of the need for comprehensive financial planning

Answer

Enhanced decision-making

Answer

Increased financial flexibility

Answer

Reduced risk of project failure

Question 2

When evaluating a capital budgeting project, which factor is excluded from direct consideration?

Accepted Answer

Current market environment

Answer

Initial investment cost

Answer

Anticipated cash flows

Answer

Project risk assessment

Question 3

Which of the following is a quantitative factor used in capital budgeting?

Accepted Answer

Net Present Value (NPV)

Answer

Market share impact

Answer

Risk tolerance

Question 4

Which of the following is the most common capital budgeting method that considers the time value of money?

Accepted Answer

Net present value

Answer

Payback period

Answer

Profitability index

Answer

Return on investment

Question 5

Sensitivity analysis is used to determine the impact of:

Accepted Answer

Changing input variables on project outcomes

Answer

The project's risk

Answer

The optimal investment level

Answer

The project's payback period

Question 6

Which technique is used to adjust cash flows for the time value of money?

Accepted Answer

Discounted cash flow (DCF)

Answer

Payback period

Answer

Profitability index

Answer

Internal rate of return (IRR)

Question 7

The weighted average cost of capital (WACC) signifies:

Accepted Answer

The required return on all sources of financing

Answer

Cost of equity financing only

Answer

Cost of debt financing only

Answer

Average cost of all assets

Question 8

Which method is not used to calculate the Internal Rate of Return (IRR)?

Accepted Answer

Payback period

Answer

Trial and error

Answer

Linear interpolation

Answer

NPV profile

Question 9

A project with high operating leverage is considered:

Accepted Answer

More risky

Answer

Less risky

Answer

Unaffected by operating risk

Answer

Equally risky

Question 10

Capital rationing occurs when a company:

Accepted Answer

Faces limited funds for investment purposes

Answer

Has unlimited funds available for investment

Answer

Is unwilling to invest in any projects

Answer

Invests in all available projects

Question 11

Sensitivity analysis in capital budgeting primarily aims to:

Accepted Answer

Examine the impact of varying assumptions on project outcomes

Answer

Eliminate project risk entirely

Answer

Ensure a positive NPV

Answer

Increase the accuracy of cash flow projections

Question 12

The payback period is a capital budgeting technique that measures:

Accepted Answer

The time required to recover the initial investment

Answer

The average return over the project's life

Answer

The present value of future cash flows

Answer

The maximum possible profit on the investment

Question 13

A project with a high degree of operating leverage:

Accepted Answer

Is more sensitive to changes in sales volume

Answer

Has a higher proportion of fixed costs to variable costs

Answer

Requires a smaller initial investment

Answer

Has a lower break-even point

Question 14

Which of the following is NOT a type of capital budgeting decision?

Accepted Answer

Bankruptcy decisions

Answer

Accept/reject decisions

Answer

Mutually exclusive decisions

Answer

Incremental decisions

Question 15

Which capital budgeting method does not account for the time value of money?

Accepted Answer

Payback period

Answer

Net present value (NPV)

Answer

Internal rate of return (IRR)

Answer

Profitability index

Question 16

A project with an NPV of zero means it is:

Accepted Answer

Indifferent

Answer

Acceptable

Answer

Unacceptable

Answer

Highly profitable

Question 17

The IRR of a project represents:

Accepted Answer

The discount rate that equates the NPV to zero

Answer

The expected rate of return on the project

Answer

The maximum cost of capital the project can support

Answer

The breakeven point of the project

Question 18

A project with a high payback period and a low NPV is likely:

Accepted Answer

Unacceptable

Answer

Highly profitable

Answer

Acceptable

Answer

Indifferent

Question 19

The purpose of sensitivity analysis is to:

Accepted Answer

Determine how changes in assumptions affect project outcomes

Answer

Identify the most critical assumptions in a capital budgeting model

Answer

Calculate the breakeven point of a project

Answer

Estimate the probability of a project's success

Question 20

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

Accepted Answer

To test the impact of changing assumptions on project outcomes

Answer

To determine the minimum required rate of return

Answer

To estimate the project's payback period

Answer

To evaluate the project's risk

Question 21

Which of the following is a known limitation of using discounted cash flow techniques for capital budgeting?

Accepted Answer

Relies on estimates and assumptions

Answer

Ignores the time value of money

Answer

Can be complex to calculate

Answer

Requires a perfect forecast of future cash flows

Question 22

What is the capital rationing problem?

Accepted Answer

When a firm has multiple projects to invest in but has limited capital

Answer

When a firm's projects have different levels of risk

Answer

When a firm's cost of capital changes over time

Answer

When a firm's cash flows are uncertain

Question 23

What is the key difference between an independent and a mutually exclusive project?

Accepted Answer

Independent projects can be evaluated separately, while mutually exclusive projects cannot

Answer

Mutually exclusive projects can be evaluated separately, while independent projects cannot

Answer

Independent projects have higher risks than mutually exclusive projects

Answer

Mutually exclusive projects have higher costs than independent projects

Question 24

Which of the following is a widely used hurdle rate in capital budgeting?

Accepted Answer

Weighted average cost of capital (WACC)

Answer

Cost of equity

Answer

Internal rate of return (IRR)

Answer

Payback period

Question 25

Which criterion is **not** commonly used to evaluate capital budgeting proposals?

Accepted Answer

Payout ratio

Answer

Net present value (NPV)

Answer

Internal rate of return (IRR)

Answer

Return on investment (ROI)

Question 26

A project with a positive NPV indicates that:

Accepted Answer

The project is expected to generate a net inflow of cash over its life.

Answer

The project will have a higher IRR than the company's cost of capital.

Answer

The project will have a shorter payback period than the average industry benchmark.

Answer

The project is guaranteed to be successful.

Question 27

The IRR is defined as the discount rate that makes the NPV of a project equal to:

Accepted Answer

Zero

Answer

One

Answer

The project's cost of capital

Answer

Infinity

Question 28

The payback period measures:

Accepted Answer

The time it takes for a project to generate enough cash to cover its initial investment.

Answer

The rate of return that the project is expected to generate.

Answer

The net present value of the project.

Answer

The internal rate of return of the project.

Question 29

A project with a positive Net Present Value (NPV) should be:

Accepted Answer

Accepted

Answer

Rejected

Answer

Re-evaluated

Answer

Deferred

Question 30

A project with a high risk should have:

Accepted Answer

A higher discount rate

Answer

A lower discount rate

Answer

No impact on discount rate

Answer

A negative discount rate

Question 31

Which of the following is a benefit of using sensitivity analysis in capital budgeting?

Accepted Answer

Identifies key variables affecting project outcomes

Answer

Eliminates uncertainty

Answer

Guarantees project success

Answer

Simplifies decision-making

Question 32

The optimal capital structure for a firm is one that:

Accepted Answer

Minimizes the weighted average cost of capital

Answer

Maximizes the debt-to-equity ratio

Answer

Eliminates financial risk

Answer

Guarantees positive returns

Question 33

A project with a payback period of 3 years and a positive Net Present Value (NPV) should be:

Accepted Answer

Accepted

Answer

Rejected

Answer

Re-evaluated

Answer

Deferred

Question 34

Which of the following is **not** a type of financial analysis used in capital budgeting?

Accepted Answer

Regression analysis

Answer

Break-even analysis

Answer

Scenario analysis

Answer

Sensitivity analysis

Question 35

A project with a profitability index of 1.2 indicates that:

Accepted Answer

The project generates more value than its cost

Answer

The project generates less value than its cost

Answer

The project breaks even

Answer

The project has a negative NPV

Question 36

Which of the following is NOT a quantitative factor considered in evaluating an investment?

Accepted Answer

Market demand

Answer

Net present value (NPV)

Answer

Internal rate of return (IRR)

Answer

Payback period

Question 37

A project with a negative NPV should generally be:

Accepted Answer

Rejected

Answer

Accepted

Answer

Further analyzed

Answer

Deferred until later

Question 38

Which method of investment evaluation considers the time value of money?

Accepted Answer

Discounted payback period

Answer

Payback period

Answer

ARR (Average rate of return)

Answer

Profitability index

Question 39

A project with an IRR of 15% and a cost of capital of 10% should be:

Accepted Answer

Accepted

Answer

Rejected

Answer

Further analyzed

Answer

Deferred until later

Question 40

In a capital budgeting scenario involving the replacement of an existing asset, which of these techniques is most appropriate to employ?

Accepted Answer

Incremental Cash Flow Analysis

Answer

Equivalent Annual Cost (EAC) method

Answer

Payback Period method

Answer

Profitability Index method

Question 41

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

Accepted Answer

Current political stability

Answer

Project risk assessment

Answer

Potential synergy effects

Answer

Management's experience and capabilities

Question 42

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

Accepted Answer

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

Answer

To identify the most optimistic scenario for project outcomes

Answer

To eliminate uncertainty from the decision-making process

Answer

To determine the maximum investment possible for the project

Question 43

A project has a positive NPV and an IRR of 12%. What can be concluded about the project in relation to the firm's required rate of return?

Accepted Answer

The project is acceptable if the firm's required rate of return is less than 12%

Answer

The project is unacceptable regardless of the required rate of return

Answer

More information is required to determine the acceptability of the project

Question 44

Which of the following factors should NOT be considered when making capital budgeting decisions?

Accepted Answer

Personal preferences of management

Answer

Project cash flows

Answer

Project risk

Answer

Time value of money

Question 45

A company is evaluating a project with an initial investment of $2 million and estimated annual cash inflows of $500,000 over the next 5 years. The firm's required rate of return is 10%. What is the project's Profitability Index?

Accepted Answer

1.25

Answer

0.75

Answer

1.00

Question 46

Which advantage does scenario analysis offer in capital budgeting?

Accepted Answer

It generates a range of potential outcomes

Answer

It is less complex than deterministic methods

Answer

It does not require subjective judgments

Answer

It eliminates uncertainty in cash flow projections

Question 47

Two projects, A and B, are mutually exclusive. Project A has an NPV of $600,000, while Project B has an NPV of $500,000. Which project should be chosen?

Accepted Answer

Project A

Answer

Neither project

Answer

Project B

Answer

More information is needed

Question 48

Which of the following is a quantitative factor used in capital budgeting?

Accepted Answer

Net present value

Answer

Management experience

Answer

Corporate reputation