Capital Budgeting Practice Exam
What is the primary objective of capital budgeting?
A) To determine the profitability of a project
B) To calculate the required return rate
C) To choose the appropriate financing method
D) To select long-term investment projects that are expected to yield the highest returns
Which of the following is considered a capital budgeting technique?
A) Payback period
B) Debt-to-equity ratio
C) Quick ratio
D) Current ratio
What does the net present value (NPV) method primarily focus on?
A) The initial investment required for a project
B) The time value of money and expected cash inflows
C) The risk associated with a project
D) The total cost of a project
Which of the following is true for a project with a positive NPV?
A) The project should be rejected
B) The project is expected to add value to the firm
C) The project is expected to break even
D) The project has no impact on the company’s cash flow
In the payback period method, what is being measured?
A) The time it takes for a project to pay back its initial investment
B) The profitability of a project
C) The total revenue from a project
D) The expected net income from a project
Which of the following is a limitation of the payback period method?
A) It ignores the time value of money
B) It considers long-term profitability
C) It includes the cash inflows from a project after the payback period
D) It accounts for all costs associated with the project
The internal rate of return (IRR) is the discount rate at which:
A) NPV equals the initial investment
B) NPV equals zero
C) Payback period equals the life of the project
D) The project’s cost equals its revenue
Which of the following methods is considered the most reliable for capital budgeting?
A) Payback period
B) NPV method
C) Accounting rate of return
D) IRR method
Which of the following factors is ignored in the IRR method?
A) Time value of money
B) Cash flow patterns
C) Initial investment
D) Multiple IRR solutions in non-conventional cash flow projects
If a project’s IRR is higher than the required rate of return, the project:
A) Should be accepted
B) Should be rejected
C) Should be postponed
D) Should be analyzed for risk
What is the modified internal rate of return (MIRR) designed to address?
A) The assumption of reinvestment at the IRR
B) The inability to calculate IRR
C) Cash inflows occurring in the first year
D) The time value of money
Which of the following is true when calculating the NPV of a project?
A) Future cash flows are discounted at the firm’s cost of capital
B) Only initial cash flows are considered
C) The project’s net cash flows are ignored
D) Future cash flows are ignored
What does a higher payback period indicate about a project?
A) The project is more profitable
B) The project takes longer to recover the initial investment
C) The project generates cash inflows quickly
D) The project has a higher risk
When using the NPV method, a discount rate that is too low may lead to:
A) Rejecting profitable projects
B) Accepting unprofitable projects
C) Accurate decision-making
D) Increased returns
Which of the following methods considers the time value of money?
A) Payback period
B) Net present value (NPV)
C) Accounting rate of return (ARR)
D) Profitability index
What does the profitability index measure?
A) The ratio of the initial investment to the NPV
B) The ratio of the NPV to the initial investment
C) The payback period of the project
D) The internal rate of return
What would likely be a reason for using a higher discount rate in capital budgeting?
A) To account for the project’s greater risk
B) To increase the project’s NPV
C) To reduce the payback period
D) To ignore future cash flows
Which method is best for comparing mutually exclusive projects?
A) Payback period
B) Internal rate of return (IRR)
C) Net present value (NPV)
D) Modified internal rate of return (MIRR)
If two projects are independent, which of the following methods should be used to evaluate them?
A) IRR method
B) Payback period method
C) NPV method
D) Profitability index method
A project is deemed acceptable using the NPV method when:
A) NPV is less than zero
B) NPV equals zero
C) NPV is greater than zero
D) NPV is equal to the initial investment
Which of the following is NOT typically considered a relevant cash flow when evaluating a capital budgeting project?
A) Sunk costs
B) Incremental revenue
C) Opportunity costs
D) Working capital changes
What is a major advantage of using the NPV method over the IRR method?
A) NPV provides a single value that can be compared directly to the required return
B) IRR assumes that cash flows are reinvested at the project’s IRR
C) NPV is easier to calculate than IRR
D) IRR accounts for the project’s risk
Which of the following methods of capital budgeting does NOT consider the time value of money?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Payback period
D) Modified internal rate of return (MIRR)
If a project’s NPV is negative, what is the most likely decision?
A) Accept the project, as it generates value
B) Reject the project, as it destroys value
C) Reevaluate the risk factors
D) Increase the discount rate
In capital budgeting, the weighted average cost of capital (WACC) is used primarily as:
A) The discount rate to calculate NPV
B) The rate at which cash flows are expected to grow
C) A measure of risk in the IRR method
D) The rate at which profits are generated
Which of the following is true about the internal rate of return (IRR)?
A) It is the discount rate that results in a positive NPV
B) It is the rate at which the NPV of the project equals the required rate of return
C) It is the rate that makes the NPV equal to zero
D) It is higher than the required rate of return for a project to be accepted
Which of the following is a reason why the NPV method is preferred over the IRR method in capital budgeting?
A) NPV assumes reinvestment of cash flows at the required rate of return, not the IRR
B) NPV is easier to calculate than IRR
C) NPV ignores risk factors
D) NPV uses a fixed discount rate for all projects
In capital budgeting, which of the following is typically NOT included in the analysis?
A) Future salvage value
B) Opportunity costs
C) Sunk costs
D) Incremental revenues and costs
What does a profitability index of less than 1.0 indicate?
A) The project is profitable and should be accepted
B) The project has a negative NPV and should be rejected
C) The project is likely to break even
D) The project’s internal rate of return is too high
When using the payback period method, what is typically assumed about cash flows?
A) Cash flows are reinvested at the internal rate of return
B) Cash flows are received in equal amounts each year
C) Cash flows vary over time based on market conditions
D) Cash flows are ignored beyond the payback period
Which of the following is a limitation of the net present value (NPV) method?
A) It ignores the time value of money
B) It assumes that cash flows are reinvested at the project’s cost of capital
C) It is difficult to calculate for large projects
D) It does not consider the risk of the project
Which of the following methods of capital budgeting assumes that cash flows are reinvested at the internal rate of return (IRR)?
A) NPV method
B) Payback period
C) IRR method
D) Modified internal rate of return (MIRR) method
In capital budgeting, the cost of capital refers to:
A) The required rate of return on the firm’s equity capital
B) The discount rate used to determine the present value of cash flows
C) The interest rate on debt financing
D) The rate of return on short-term investments
When comparing mutually exclusive projects, which capital budgeting technique is most appropriate?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Accounting rate of return (ARR)
If a project’s NPV is zero, what does this imply about the project’s cash flows?
A) The cash inflows are greater than the initial investment
B) The cash inflows exactly offset the initial investment and the cost of capital
C) The project is unprofitable
D) The project is not financially feasible
Which of the following would most likely decrease the NPV of a capital budgeting project?
A) Increasing the discount rate
B) Decreasing the discount rate
C) Increasing cash inflows
D) Extending the project’s lifespan
What is the primary advantage of the modified internal rate of return (MIRR) over the IRR?
A) MIRR assumes reinvestment at the firm’s cost of capital rather than the project’s IRR
B) MIRR provides a more conservative estimate of profitability
C) MIRR accounts for changes in cash flow patterns over time
D) MIRR eliminates the possibility of multiple IRR solutions
Which of the following would increase the net present value (NPV) of a project?
A) Increasing the initial investment required for the project
B) Decreasing the discount rate used in the NPV calculation
C) Increasing the project’s lifespan
D) Increasing the project’s cash outflows
In capital budgeting, which of the following would be considered a cash inflow for a project?
A) Depreciation expenses
B) Sunk costs
C) Sales revenue generated by the project
D) The cost of financing the project
When evaluating a project using the NPV method, which of the following cash flows should be discounted?
A) Only the initial investment
B) Only the project’s terminal value
C) All future cash inflows and outflows
D) Only the variable costs associated with the project
What is the primary purpose of capital budgeting?
A) To determine how much debt a company can take on
B) To analyze whether an investment project will add value to the company
C) To evaluate the tax consequences of a project
D) To forecast future sales revenue
Which of the following is NOT a characteristic of the payback period method?
A) It ignores the time value of money
B) It provides a quick estimate of project risk
C) It does not consider cash flows beyond the payback period
D) It is based on the discounted cash flow method
If the internal rate of return (IRR) for a project is greater than the cost of capital, what should be the decision?
A) Reject the project
B) Accept the project
C) Recalculate the payback period
D) Decrease the required rate of return
Which of the following methods of capital budgeting is most likely to lead to incorrect decisions when comparing mutually exclusive projects?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Profitability index (PI)
D) Payback period
In capital budgeting, which of the following is considered a sunk cost?
A) Initial investment in a project
B) Previous marketing expenses related to the project
C) Future maintenance costs of the project
D) Depreciation on the project’s assets
What does the profitability index (PI) measure?
A) The expected profitability of a project in percentage terms
B) The ratio of the present value of future cash inflows to the initial investment
C) The payback period required for a project
D) The rate at which a project’s cash flows are reinvested
Which of the following is a disadvantage of using the payback period as a method of capital budgeting?
A) It ignores the time value of money
B) It is too complex to calculate
C) It requires a high level of accuracy in forecasting future cash flows
D) It fails to consider the liquidity of the company
Which of the following factors is the most important when selecting a discount rate for capital budgeting?
A) The average rate of return on investment
B) The firm’s cost of capital
C) The current inflation rate
D) The rate of return expected by shareholders
Which of the following methods of capital budgeting is particularly useful for companies with limited capital resources?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Profitability index (PI)
D) Payback period
In the context of capital budgeting, what does a positive NPV indicate?
A) The project is not worth investing in
B) The project is expected to generate more than the required return
C) The project has no effect on the company’s value
D) The project will break even
Which of the following cash flows is typically excluded from a capital budgeting analysis?
A) Incremental operating costs
B) Salvage value
C) Sunk costs
D) Depreciation
What is the main advantage of using the modified internal rate of return (MIRR) over the IRR?
A) MIRR accounts for non-reinvestment of cash flows at the internal rate of return
B) MIRR is a better measure of liquidity
C) MIRR does not require estimating cash flows beyond the first year
D) MIRR accounts for the risk-adjusted return
Which of the following is a reason why a project with a high IRR may not be acceptable?
A) The project has a negative NPV
B) The project has insufficient liquidity
C) The project’s cash flows are highly uncertain
D) The project exceeds the firm’s budget
If a project has a positive net present value (NPV) but a payback period that is too long, what decision should be made?
A) Reject the project based on the payback period
B) Accept the project based on NPV alone
C) Recalculate the NPV with a higher discount rate
D) Delay the decision until more information is available
Which of the following does NOT typically affect the decision to accept or reject a capital budgeting project?
A) The initial investment
B) The estimated future cash inflows
C) The required rate of return
D) The company’s profitability ratio
How does increasing the discount rate affect the NPV of a project?
A) It increases the NPV
B) It decreases the NPV
C) It does not affect the NPV
D) It makes the NPV equal to zero
Which of the following best describes the relationship between NPV and the discount rate?
A) NPV increases as the discount rate increases
B) NPV decreases as the discount rate increases
C) NPV remains constant regardless of the discount rate
D) NPV is independent of the discount rate
Which of the following methods is most suitable for evaluating independent projects?
A) Payback period
B) Internal rate of return (IRR)
C) Net present value (NPV)
D) Profitability index (PI)
What is the key difference between the NPV and the IRR methods?
A) NPV uses the discount rate to calculate the present value, while IRR calculates the rate at which NPV equals zero
B) NPV is more complicated to calculate than IRR
C) NPV does not consider the time value of money, but IRR does
D) NPV is better for large projects, while IRR is better for small projects
Which of the following statements is true when comparing two mutually exclusive projects with different lifespans?
A) The project with the higher IRR should always be chosen
B) The project with the lower cost of capital should always be chosen
C) NPV is a better method for comparing mutually exclusive projects with different lifespans
D) The payback period method is more accurate than NPV for comparing such projects
Which of the following is the most important assumption made by the net present value (NPV) method?
A) Cash flows are reinvested at the project’s internal rate of return (IRR)
B) Cash flows are reinvested at the project’s cost of capital
C) Cash flows are not reinvested
D) The project’s cost of capital changes over time
Which of the following would increase the internal rate of return (IRR) of a project?
A) Decreasing the initial investment
B) Increasing the project’s lifespan
C) Increasing the discount rate
D) Increasing future cash outflows
Which of the following is an example of a mutually exclusive project?
A) Two projects that can be run simultaneously without affecting each other
B) A project where the company must choose between two alternatives, only one of which can be accepted
C) Two projects that are both acceptable based on the NPV method
D) A project that does not require any capital investment
If the internal rate of return (IRR) exceeds the required rate of return, what should the decision be?
A) Reject the project
B) Accept the project
C) Recalculate the project’s NPV
D) Recalculate the project’s payback period
Which of the following is NOT typically considered when estimating future cash flows for a capital budgeting project?
A) Sales revenue from the project
B) Operating costs associated with the project
C) Interest expense on the project’s financing
D) Depreciation expense of the project
Which of the following is a potential problem when using the IRR method for capital budgeting?
A) It does not account for the time value of money
B) It can provide multiple solutions for projects with non-conventional cash flows
C) It ignores the scale of the project
D) It is difficult to calculate for large projects
Which of the following statements is true when comparing NPV and IRR?
A) IRR is more reliable when comparing mutually exclusive projects
B) NPV is generally preferred over IRR in most situations because it provides more accurate results
C) IRR is not sensitive to changes in the discount rate
D) NPV assumes cash flows are reinvested at the IRR, while IRR assumes cash flows are reinvested at the firm’s cost of capital
Which of the following methods of capital budgeting is best suited for evaluating projects with unequal lifespans?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Profitability index (PI)
D) Equivalent annual cost (EAC)
The profitability index (PI) is useful because it:
A) Measures the return on investment relative to the investment size
B) Ignores the time value of money
C) Is always equal to 1 for mutually exclusive projects
D) Is less reliable than the payback period method
In capital budgeting, the weighted average cost of capital (WACC) is used to:
A) Discount the expected future cash flows of a project
B) Calculate the expected return of the project
C) Determine the required operating income of the project
D) Estimate the depreciation expense for the project
Which of the following factors is MOST important when selecting the discount rate for NPV calculations?
A) The expected rate of return on equity
B) The company’s cost of debt
C) The company’s overall cost of capital, including debt and equity
D) The inflation rate in the industry
If a project has an IRR greater than the required rate of return, the project should be:
A) Rejected, because it will not generate enough profit
B) Accepted, because the IRR exceeds the required rate of return
C) Delayed until more information is available
D) Reanalyzed using the payback period method
Which of the following is a key disadvantage of using the payback period method?
A) It takes into account the time value of money
B) It ignores cash flows beyond the payback period
C) It requires the estimation of future cash flows
D) It is difficult to calculate for small projects
Which of the following is considered a sunk cost when evaluating a capital budgeting project?
A) The initial investment in the project
B) The cost of market research conducted before the project
C) The expected future cash inflows from the project
D) The required cost of capital for the project
In the context of capital budgeting, a project’s terminal value refers to:
A) The initial investment required to begin the project
B) The present value of cash flows beyond the forecast period
C) The value of the company after the project is completed
D) The final cash inflow expected from the project
Which of the following is an example of an independent project in capital budgeting?
A) Two projects where the acceptance of one does not affect the other
B) Two projects where the acceptance of one project automatically leads to the rejection of the other
C) A project where the cost of capital is shared by multiple projects
D) A project that does not require any upfront investment
Which of the following methods is most appropriate for projects with cash flows that vary significantly over time?
A) Internal rate of return (IRR)
B) Payback period
C) Net present value (NPV)
D) Profitability index (PI)
Which of the following is a common reason for rejecting a project using the NPV method?
A) The project has an NPV greater than zero
B) The project has a negative NPV
C) The project has a high internal rate of return
D) The project has a high profitability index
Which of the following factors would likely cause the internal rate of return (IRR) to be higher for a project?
A) Increasing future cash inflows
B) Decreasing the cost of capital
C) Increasing the initial investment
D) Extending the life of the project
Which of the following is the primary disadvantage of the NPV method?
A) It assumes reinvestment of cash flows at the IRR
B) It is difficult to use for large projects
C) It may not be suitable for projects with long-term cash flows
D) It requires accurate estimates of future cash flows
Which of the following methods does NOT consider the time value of money?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Payback period
D) Profitability index (PI)
The primary goal of capital budgeting is to:
A) Minimize initial investment
B) Maximize shareholder wealth
C) Reduce operating costs
D) Increase the payback period
Which of the following would decrease the net present value (NPV) of a project?
A) An increase in expected future cash inflows
B) A reduction in the discount rate
C) An increase in the initial investment
D) A reduction in the project’s lifespan
Which of the following is a common method used to evaluate projects that require similar investments but have different life spans?
A) Internal rate of return (IRR)
B) Equivalent annual cost (EAC)
C) Payback period
D) Profitability index
If a project’s NPV is negative, the project should:
A) Be accepted because the internal rate of return is positive
B) Be rejected because it is expected to destroy value
C) Be accepted because the profitability index is greater than 1
D) Be delayed until future market conditions improve
Which of the following would most likely lead to a lower internal rate of return (IRR) for a capital budgeting project?
A) A decrease in the initial investment
B) An increase in the project’s future cash inflows
C) A reduction in the required rate of return
D) An increase in future cash outflows
Which of the following would be an appropriate reason for using the profitability index (PI) in capital budgeting decisions?
A) When the firm has multiple projects with differing scales of investment
B) When there are insufficient funds to undertake all potential projects
C) When the firm is considering mutually exclusive projects
D) When the firm’s cost of capital is fluctuating
Which of the following represents the true economic cost of capital in capital budgeting?
A) The company’s required rate of return
B) The weighted average cost of capital (WACC)
C) The historical cost of capital
D) The rate of return on similar investments
A project with an internal rate of return (IRR) that is less than the required rate of return will:
A) Increase shareholder value
B) Be accepted if the net present value (NPV) is positive
C) Be rejected because it is expected to reduce value
D) Be accepted if the profitability index (PI) is greater than 1
Which of the following is a key advantage of using the NPV method in capital budgeting?
A) It is easy to compute and understand
B) It accounts for the time value of money and provides a clear decision rule
C) It is the best method for short-term projects
D) It does not require the estimation of future cash flows
Which of the following is NOT a limitation of the payback period method?
A) It does not account for the time value of money
B) It ignores cash flows beyond the payback period
C) It is suitable for long-term investment analysis
D) It does not provide a clear picture of profitability
Which of the following would likely lead to a higher profitability index (PI) for a project?
A) A decrease in the initial investment
B) An increase in the discount rate
C) A reduction in future cash inflows
D) A decrease in the project’s lifespan
Which of the following methods of capital budgeting is most appropriate when comparing mutually exclusive projects with different investment sizes?
A) Net present value (NPV)
B) Payback period
C) Internal rate of return (IRR)
D) Equivalent annual cost (EAC)
If two mutually exclusive projects have the same initial investment and different cash flows, which method would likely provide the most reliable decision rule?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Payback period
D) Profitability index (PI)
A project’s internal rate of return (IRR) is best described as:
A) The discount rate that makes the NPV of the project equal to zero
B) The rate of return that maximizes the firm’s value
C) The required return for the project
D) The rate of return expected from the project’s initial investment
Which of the following represents the value of the project from an investor’s perspective in capital budgeting?
A) The net present value (NPV)
B) The internal rate of return (IRR)
C) The payback period
D) The profitability index (PI)
Which of the following is a disadvantage of using the equivalent annual cost (EAC) method in capital budgeting?
A) It ignores the time value of money
B) It cannot be used for projects with unequal lifespans
C) It is not suitable for evaluating independent projects
D) It requires accurate estimates of the project’s lifespan
The key difference between the net present value (NPV) and the internal rate of return (IRR) methods is that:
A) NPV assumes cash flows are reinvested at the project’s cost of capital, while IRR assumes reinvestment at the IRR
B) NPV accounts for the time value of money, while IRR does not
C) NPV uses the payback period, while IRR does not
D) NPV is based on the profitability index, while IRR uses the cost of capital
The profitability index (PI) is calculated as:
A) Net present value (NPV) divided by the initial investment
B) Internal rate of return (IRR) divided by the required rate of return
C) Present value of cash inflows divided by the initial investment
D) Payback period divided by the project’s lifespan
When applying the net present value (NPV) method, what happens if the discount rate is increased?
A) The NPV of the project increases
B) The NPV of the project decreases
C) The NPV remains unaffected
D) The internal rate of return (IRR) increases
Which of the following is true about the payback period method?
A) It accounts for the time value of money
B) It does not consider cash flows beyond the payback period
C) It is a comprehensive method for evaluating all types of projects
D) It is the best method for evaluating large, complex projects
Which of the following statements about internal rate of return (IRR) is correct?
A) The IRR is the rate that maximizes the payback period
B) The IRR assumes that intermediate cash inflows are reinvested at the project’s cost of capital
C) If the IRR exceeds the required rate of return, the project should be accepted
D) The IRR method is not affected by the scale of investment
A project has an initial investment of $200,000 and is expected to generate $50,000 per year for the next five years. The company uses a discount rate of 10%. What is the NPV of the project?
A) $50,000
B) $12,571.14
C) $200,000
D) $150,000
Which of the following is a limitation of the internal rate of return (IRR) method?
A) It assumes reinvestment of cash inflows at the cost of capital
B) It can give multiple rates of return for non-conventional cash flow patterns
C) It accounts for the time value of money
D) It is better than NPV for mutually exclusive projects
Which method is most appropriate for comparing two mutually exclusive projects that require different amounts of investment?
A) Net present value (NPV)
B) Payback period
C) Profitability index (PI)
D) Equivalent annual cost (EAC)
Which of the following is a characteristic of a project with a negative NPV?
A) It will add value to the firm
B) It is expected to decrease shareholder wealth
C) It has a higher IRR than the required rate of return
D) It is a good candidate for investment
The profitability index (PI) is useful in capital budgeting when:
A) A project has no initial investment
B) The firm has budget constraints and can only accept projects with the highest PI
C) The firm is comparing mutually exclusive projects with equal investments
D) Cash flows are guaranteed for the life of the project
If the internal rate of return (IRR) of a project is greater than the required rate of return, then:
A) The project should be rejected
B) The project should be accepted
C) The project will have a negative net present value (NPV)
D) The project will have a profitability index less than 1
Which of the following would most likely result in an increase in a project’s net present value (NPV)?
A) A decrease in the cost of capital
B) A decrease in the project’s cash inflows
C) An increase in the project’s initial investment
D) An increase in the project’s lifespan
The internal rate of return (IRR) for a project is the:
A) Discount rate that makes the NPV equal to zero
B) Required rate of return for the project
C) Cash flow required to break even
D) Rate at which the project’s payback period is maximized
Which of the following capital budgeting methods assumes that all cash inflows are reinvested at the IRR?
A) Net present value (NPV)
B) Profitability index (PI)
C) Internal rate of return (IRR)
D) Equivalent annual cost (EAC)
The payback period for a project with an initial investment of $400,000 and annual cash inflows of $100,000 would be:
A) 4 years
B) 5 years
C) 6 years
D) 8 years
Which of the following is true about the profitability index (PI)?
A) It is calculated by dividing the NPV by the initial investment
B) A project with a PI greater than 1 should be rejected
C) It is a preferred method when comparing projects of equal size
D) It does not account for the time value of money
Which of the following is a disadvantage of the equivalent annual cost (EAC) method?
A) It requires complex calculations
B) It does not account for differences in project scale
C) It only applies to mutually exclusive projects
D) It ignores the time value of money
Which of the following methods is best suited for evaluating the value of a project over its entire life cycle?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Payback period
D) Profitability index (PI)
A firm should accept a project if its net present value (NPV) is:
A) Positive
B) Zero
C) Negative
D) Greater than the internal rate of return (IRR)
Which of the following capital budgeting methods provides a clear decision rule based on profitability?
A) Payback period
B) Profitability index (PI)
C) Internal rate of return (IRR)
D) Net present value (NPV)
If the cost of capital increases, what is the expected effect on the net present value (NPV) of a project?
A) The NPV will increase
B) The NPV will remain the same
C) The NPV will decrease
D) The NPV may increase or decrease
Which of the following is an advantage of using the internal rate of return (IRR) method?
A) It considers the time value of money and provides a rate of return that can be easily compared with the cost of capital
B) It is easy to compute
C) It works well with non-conventional cash flows
D) It ignores future cash flows beyond the initial investment
The equivalent annual cost (EAC) is used to:
A) Compare projects with unequal lifespans
B) Evaluate mutually exclusive projects
C) Determine the profitability of a project
D) Estimate the internal rate of return
Which of the following is true about the internal rate of return (IRR) for a project?
A) It is unaffected by changes in cash flow estimates
B) It is the discount rate that makes the NPV of the project equal to zero
C) It is the required return for the project
D) It is the same as the payback period
Which of the following capital budgeting methods is best when there are cash flow uncertainties?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Sensitivity analysis
If a firm is evaluating two mutually exclusive projects with identical NPV profiles, it should choose the project with:
A) The higher initial investment
B) The higher internal rate of return (IRR)
C) The higher profitability index (PI)
D) The shorter payback period
The net present value (NPV) method assumes that:
A) All future cash flows are reinvested at the IRR
B) All future cash flows are reinvested at the cost of capital
C) The firm can adjust its project investments to maximize cash inflows
D) The discount rate changes over time
If the profitability index (PI) is less than 1, the project should be:
A) Accepted
B) Rejected
C) Delayed
D) Evaluated further
What is the main purpose of capital budgeting?
A) To determine the short-term financing needs of the company
B) To evaluate the potential long-term investments of the company
C) To calculate the cost of capital
D) To analyze the liquidity of the company
Which method is best for evaluating projects with unequal lifespans?
A) Net present value (NPV)
B) Payback period
C) Equivalent annual cost (EAC)
D) Internal rate of return (IRR)
Which of the following is a disadvantage of the payback period method?
A) It ignores the time value of money
B) It does not consider the liquidity of the project
C) It accounts for all future cash flows
D) It requires complex calculations
What does the profitability index (PI) measure?
A) The expected rate of return on a project
B) The amount of profit generated by the project
C) The ratio of present value of cash inflows to initial investment
D) The average cash inflow of the project
In capital budgeting, if a project has a positive NPV, it:
A) Will decrease the firm’s value
B) Should be rejected
C) Will increase the firm’s value
D) Is not a viable option
What does the term “discounted payback period” refer to?
A) The time it takes to recover the initial investment without considering the time value of money
B) The time it takes to recover the initial investment considering the time value of money
C) The time to break even on the investment
D) The average time to generate a positive cash flow
Which of the following would likely increase the net present value (NPV) of a project?
A) A higher initial investment
B) An increase in future cash inflows
C) A lower discount rate
D) Both B and C
If a project has a net present value of zero, what does this imply?
A) The project will add no value to the firm
B) The project will increase shareholder wealth
C) The project’s return equals the required rate of return
D) The project should be rejected
Which of the following methods assumes that intermediate cash flows are reinvested at the project’s cost of capital?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Payback period
D) Profitability index (PI)
A project has an initial investment of $500,000 and is expected to generate cash flows of $150,000 per year for 5 years. What is the project’s payback period?
A) 3 years
B) 3.5 years
C) 4 years
D) 5 years
The modified internal rate of return (MIRR) method is used to address the limitations of:
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Profitability index (PI)
Which capital budgeting technique is best when a firm is choosing between projects that require different levels of investment?
A) Net present value (NPV)
B) Payback period
C) Profitability index (PI)
D) Internal rate of return (IRR)
Which of the following capital budgeting methods is most appropriate when the project’s life span is uncertain?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Equivalent annual cost (EAC)
The profitability index (PI) of a project is equal to:
A) The initial investment divided by the net present value (NPV)
B) The present value of inflows divided by the present value of outflows
C) The NPV divided by the initial investment
D) The internal rate of return (IRR) divided by the required rate of return
Which of the following is a common assumption in the net present value (NPV) method?
A) The reinvestment rate is equal to the cost of capital
B) Cash flows are discounted at the project’s IRR
C) All projects are mutually exclusive
D) Cash flows are paid in equal intervals
Which of the following is a key assumption of the internal rate of return (IRR) method?
A) Cash flows are reinvested at the internal rate of return
B) Cash flows are reinvested at the cost of capital
C) The initial investment is paid over multiple periods
D) The project will always have a positive NPV
Which of the following capital budgeting methods does not require the use of a discount rate?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Payback period
D) Profitability index (PI)
If a firm’s required rate of return is 10%, and the IRR of a project is 12%, the project should be:
A) Accepted
B) Rejected
C) Evaluated using a different method
D) Postponed
A project has a cash inflow of $80,000 per year for 5 years and an initial investment of $300,000. What is the payback period?
A) 3.75 years
B) 4 years
C) 5 years
D) 6 years
If the cost of capital increases, the net present value (NPV) of a project will likely:
A) Stay the same
B) Increase
C) Decrease
D) Become positive
A project’s net present value (NPV) is negative when:
A) The internal rate of return (IRR) is greater than the cost of capital
B) The initial investment is greater than the sum of discounted future cash flows
C) The profitability index is greater than 1
D) The payback period is shorter than the project’s life
Which of the following methods of capital budgeting is most commonly used to evaluate large projects?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Profitability index (PI)
The profitability index (PI) is most useful for a firm with:
A) Limited capital for investment
B) No access to external financing
C) A wide range of investment opportunities
D) Equal-sized projects
If a project’s IRR is less than the firm’s required rate of return, the NPV will be:
A) Positive
B) Zero
C) Negative
D) Equal to the IRR
Which of the following is a benefit of using the net present value (NPV) method over the internal rate of return (IRR) method?
A) NPV does not assume that reinvestment occurs at the IRR
B) NPV is easier to compute than IRR
C) NPV does not require discounting future cash flows
D) NPV works better for non-conventional cash flows
Which of the following is a limitation of the payback period method?
A) It ignores the time value of money
B) It requires more time to calculate than NPV
C) It is only suitable for small projects
D) It does not account for cash inflows
Which capital budgeting technique assumes that cash flows are reinvested at the project’s IRR?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Modified internal rate of return (MIRR)
D) Profitability index (PI)
What happens when the internal rate of return (IRR) is equal to the required rate of return?
A) The project has a positive NPV
B) The project’s profitability index is zero
C) The project’s NPV is zero
D) The project should be rejected
In a project with uneven cash flows, which method is best to evaluate its profitability?
A) Payback period
B) Internal rate of return (IRR)
C) Net present value (NPV)
D) Profitability index (PI)
Which method evaluates capital budgeting projects based on their ability to maximize shareholder wealth?
A) Net present value (NPV)
B) Payback period
C) Internal rate of return (IRR)
D) Profitability index (PI)
What does the term “marginal cost of capital” refer to?
A) The average cost of all the capital raised
B) The cost of the most expensive capital raised
C) The cost of the next dollar of capital raised
D) The weighted average cost of capital (WACC)
Which of the following methods assumes that cash inflows are reinvested at the firm’s cost of capital?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Payback period
D) Profitability index (PI)
If a project has a high profitability index (PI), this means that:
A) The project should be rejected
B) The project is expected to generate high net present value (NPV)
C) The project has a long payback period
D) The project is riskier
When evaluating a capital project, which method is most sensitive to the project’s initial investment?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Profitability index (PI)
Which of the following factors is NOT considered in the net present value (NPV) method?
A) The cost of capital
B) The initial investment
C) The time value of money
D) The profitability index
Which of the following is true about the net present value (NPV) rule?
A) Projects with positive NPV should be rejected
B) Projects with negative NPV should be accepted
C) Projects with zero NPV will increase shareholder wealth
D) Projects with positive NPV should be accepted
Which of the following capital budgeting techniques does NOT require knowledge of the cost of capital?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Profitability index (PI)
D) Modified internal rate of return (MIRR)
The internal rate of return (IRR) of a project is the discount rate that makes:
A) The project’s net present value (NPV) equal to zero
B) The project’s profitability index (PI) equal to one
C) The project’s payback period equal to the project’s life
D) The project’s initial investment equal to the discounted cash inflows
The profitability index (PI) is the ratio of:
A) Present value of inflows to present value of outflows
B) NPV to the initial investment
C) Cash inflows to cash outflows
D) Initial investment to future cash inflows
Which of the following methods is most useful for comparing mutually exclusive projects with different scales of investment?
A) Net present value (NPV)
B) Payback period
C) Internal rate of return (IRR)
D) Profitability index (PI)
If the payback period for a project is less than the required payback period, the project:
A) Should be rejected
B) Has a positive NPV
C) Should be accepted
D) Is a riskier investment
A project with cash flows of $50,000 annually for 5 years requires an initial investment of $200,000. What is the payback period?
A) 3 years
B) 4 years
C) 5 years
D) 6 years
In which scenario would the profitability index (PI) be most useful?
A) When comparing projects with the same initial investment
B) When the initial investment varies across projects
C) When the projects have similar lifespans
D) When the time value of money is not considered
If the cost of capital increases, what will happen to the net present value (NPV) of a project?
A) It will increase
B) It will remain the same
C) It will decrease
D) It will become zero
Which of the following best describes the term “marginal cost of capital”?
A) The weighted average cost of capital (WACC)
B) The cost of raising an additional dollar of capital
C) The cost of the firm’s equity
D) The cost of debt for the company
What is the key assumption made when using the internal rate of return (IRR) method?
A) Cash flows are reinvested at the required rate of return
B) Cash flows are reinvested at the IRR
C) Cash inflows are constant each period
D) The initial investment is recovered immediately
If a project has a positive net present value (NPV), this means:
A) The project is expected to generate more cash inflows than the required rate of return
B) The project is expected to generate exactly the required rate of return
C) The project’s IRR is less than the cost of capital
D) The project will not generate any cash inflows
What does a negative internal rate of return (IRR) indicate about a project?
A) The project is highly profitable
B) The project is expected to generate returns below the cost of capital
C) The project will generate a positive NPV
D) The project should be accepted
Which method is commonly used to compare the value of projects with different investment sizes and lifespans?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Profitability index (PI)
D) Equivalent annual cost (EAC)
Which of the following methods would you use to analyze the profitability of a project with negative cash flows in the early years?
A) Payback period
B) Net present value (NPV)
C) Modified internal rate of return (MIRR)
D) Profitability index (PI)
Which of the following is an advantage of the profitability index (PI) over NPV?
A) It allows comparison of projects with different initial investments
B) It assumes cash flows are reinvested at the cost of capital
C) It ignores the time value of money
D) It works best for long-term projects
A project has an IRR of 15%. If the required rate of return is 10%, the project should:
A) Be rejected
B) Be accepted
C) Have a negative NPV
D) Break even
In the context of capital budgeting, which method is most sensitive to the timing of cash flows?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Payback period
D) Profitability index (PI)
The modified internal rate of return (MIRR) is preferred over IRR because it assumes:
A) Cash flows are reinvested at the project’s IRR
B) Cash flows are reinvested at the firm’s cost of capital
C) Cash inflows are received at the project’s break-even point
D) Cash flows are reinvested at the project’s profitability index
Which of the following is the primary objective of capital budgeting?
A) Maximizing shareholder wealth
B) Minimizing the cost of capital
C) Maximizing the payback period
D) Maximizing the return on investment (ROI)
A project with an initial investment of $500,000 and expected cash inflows of $100,000 per year for 10 years has a payback period of:
A) 5 years
B) 10 years
C) 4 years
D) 6 years
Which capital budgeting method is based on the principle that money today is worth more than the same amount in the future?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Profitability index (PI)
D) Payback period
If a project’s NPV is greater than zero, what can be concluded?
A) The project will generate less return than the required rate of return
B) The project will generate a positive return above the required rate of return
C) The project should be rejected
D) The project’s payback period is too long
Which of the following capital budgeting methods assumes cash flows are reinvested at the project’s internal rate of return (IRR)?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Modified internal rate of return (MIRR)
D) Payback period
Which method is commonly used to evaluate capital projects with uneven cash flows?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Profitability index (PI)
What happens to the net present value (NPV) of a project if the required rate of return is increased?
A) NPV will increase
B) NPV will stay the same
C) NPV will decrease
D) NPV will become zero
Which of the following is an advantage of the profitability index (PI)?
A) It accounts for time value of money
B) It does not require estimation of cash flows
C) It is easier to calculate than the NPV method
D) It works best with long-term projects
What is the primary disadvantage of the payback period method?
A) It ignores the time value of money
B) It is difficult to calculate
C) It does not consider cash inflows
D) It only works for large projects
The profitability index (PI) is best used when:
A) The projects have the same size of initial investment
B) The initial investment varies significantly across projects
C) The projects have identical cash flows
D) The time value of money is not considered
A project has an initial investment of $400,000 and expected annual cash inflows of $120,000 for 4 years. What is the payback period?
A) 3 years
B) 4 years
C) 2 years
D) 5 years
If a project’s internal rate of return (IRR) is less than the required rate of return, the project:
A) Should be accepted
B) Should be rejected
C) Will break even
D) Will increase shareholder value
In the context of capital budgeting, which method is often used to evaluate mutually exclusive projects with different scales of investment?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Profitability index (PI)
D) Payback period
If the internal rate of return (IRR) of a project is greater than the required rate of return, the net present value (NPV) will be:
A) Negative
B) Zero
C) Positive
D) Equal to the initial investment
Which of the following is NOT considered in the net present value (NPV) method?
A) The time value of money
B) Cash inflows and outflows over time
C) The cost of capital
D) The profitability index (PI)
Which of the following is the best approach to evaluate capital projects with high levels of risk?
A) Use the payback period method
B) Use the internal rate of return (IRR) method
C) Use the net present value (NPV) method with adjusted discount rates
D) Use the profitability index (PI)
Which method should be used to compare projects with different lifespans?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Equivalent annual cost (EAC)
D) Payback period
The internal rate of return (IRR) is the discount rate that:
A) Maximizes the project’s net present value (NPV)
B) Makes the project’s NPV equal to zero
C) Results in a positive profitability index (PI)
D) Maximizes cash flows
Which capital budgeting method uses the time value of money to evaluate projects?
A) Payback period
B) Internal rate of return (IRR)
C) Net present value (NPV)
D) Both B and C
Which of the following methods is most useful when comparing the riskiness of different capital projects?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Sensitivity analysis
Which of the following best describes the net present value (NPV) method?
A) It evaluates projects based on the total dollar value of future cash flows
B) It discounts cash flows at the project’s required rate of return
C) It assumes cash inflows are reinvested at the internal rate of return
D) It does not account for the time value of money
Which of the following is an advantage of the internal rate of return (IRR) method?
A) It is easy to understand and calculate
B) It considers the time value of money
C) It works well for projects with multiple cash inflows
D) It does not require a discount rate to evaluate a project
If the cost of capital increases, what happens to the net present value (NPV) of a project?
A) NPV increases
B) NPV stays the same
C) NPV decreases
D) NPV becomes negative
Which of the following capital budgeting methods considers the time value of money and the scale of the investment?
A) Net present value (NPV)
B) Profitability index (PI)
C) Payback period
D) Internal rate of return (IRR)
A project with a profitability index (PI) of 1.2 indicates that:
A) The project will break even
B) The project is expected to generate a positive NPV
C) The project should be rejected
D) The project’s payback period is too long
Which of the following is the most accurate method of evaluating a capital project?
A) Net present value (NPV)
B) Payback period
C) Profitability index (PI)
D) Internal rate of return (IRR)
Which of the following methods accounts for the time value of money and can be used to evaluate projects with different initial investments?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Profitability index (PI)
D) Payback period
If the internal rate of return (IRR) is greater than the cost of capital, the project will:
A) Be rejected
B) Break even
C) Add value to the firm
D) Have a negative NPV
Which of the following is a limitation of the payback period method?
A) It ignores the time value of money
B) It cannot be used for non-project investments
C) It overestimates the profitability of long-term projects
D) It includes all future cash flows without adjusting for risk
Which method uses cash flow projections to determine the time it will take for the initial investment to be recovered?
A) Profitability index (PI)
B) Payback period
C) Net present value (NPV)
D) Internal rate of return (IRR)
Which of the following would increase the net present value (NPV) of a capital project?
A) An increase in the cost of capital
B) An increase in the expected cash inflows
C) A decrease in the project’s life span
D) A decrease in the initial investment
A capital budgeting project with an IRR of 10% and a cost of capital of 8% will:
A) Have a positive NPV
B) Have a negative NPV
C) Break even
D) Have a profitability index (PI) of 1
In capital budgeting, which of the following is typically considered a disadvantage of using the payback period method?
A) It overestimates the time value of money
B) It ignores cash flows beyond the payback period
C) It is too complex to calculate
D) It assumes all cash flows are equal
Which of the following capital budgeting methods is best suited for projects with high levels of uncertainty or risk?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Sensitivity analysis
Which of the following methods measures the profitability of a project in relation to its costs?
A) Payback period
B) Profitability index (PI)
C) Internal rate of return (IRR)
D) Net present value (NPV)
A project with a profitability index (PI) of less than 1 indicates that:
A) The project should be accepted
B) The project will generate positive returns
C) The project will generate less value than its costs
D) The project’s payback period is too short
Which of the following capital budgeting methods is based on discounted future cash flows?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Profitability index (PI)
Which of the following best describes a project with a negative NPV?
A) The project is expected to generate a return greater than the cost of capital
B) The project should be accepted
C) The project is expected to destroy value for the firm
D) The project’s risk level is too low
A project has an initial investment of $300,000 and expected annual cash inflows of $60,000 for 7 years. What is the payback period?
A) 3 years
B) 5 years
C) 4 years
D) 6 years
What is the key disadvantage of the internal rate of return (IRR) method?
A) It ignores the time value of money
B) It assumes cash flows are reinvested at the cost of capital
C) It assumes cash flows are reinvested at the IRR
D) It is not applicable for long-term projects
Which of the following methods requires the estimation of the cost of capital for evaluating a project?
A) Payback period
B) Profitability index (PI)
C) Internal rate of return (IRR)
D) Net present value (NPV)
Which capital budgeting technique uses the IRR to determine the rate at which the present value of cash inflows equals the initial investment?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Profitability index (PI)
D) Modified internal rate of return (MIRR)
Which of the following methods takes into account both the time value of money and the size of the project’s investment?
A) Profitability index (PI)
B) Payback period
C) Net present value (NPV)
D) Internal rate of return (IRR)
What happens to the internal rate of return (IRR) of a project if the required rate of return increases?
A) It increases
B) It decreases
C) It stays the same
D) It becomes equal to the required rate of return
Which of the following is an advantage of using the net present value (NPV) method?
A) It is simple to calculate
B) It takes into account the time value of money
C) It does not require cash flow projections
D) It is best used for short-term projects
Which of the following is a reason to accept a project using the net present value (NPV) method?
A) The NPV is negative
B) The NPV is greater than zero
C) The NPV is equal to the cost of capital
D) The NPV is smaller than the initial investment
Which of the following capital budgeting methods assumes that the cash inflows from a project are reinvested at the project’s IRR?
A) Modified internal rate of return (MIRR)
B) Payback period
C) Net present value (NPV)
D) Internal rate of return (IRR)
Which of the following methods is generally best for evaluating mutually exclusive projects?
A) Payback period
B) Profitability index (PI)
C) Net present value (NPV)
D) Internal rate of return (IRR)
Which of the following would decrease the net present value (NPV) of a project?
A) An increase in cash inflows
B) A decrease in the initial investment
C) An increase in the discount rate
D) A decrease in the required rate of return
Which of the following capital budgeting methods is most appropriate when evaluating projects with significant differences in investment size?
A) Payback period
B) Profitability index (PI)
C) Internal rate of return (IRR)
D) Net present value (NPV)
Which of the following is NOT an assumption made when using the internal rate of return (IRR) method?
A) Cash flows are reinvested at the IRR
B) The project is of infinite duration
C) The cash flows are received over a known period
D) The cost of capital is known
What is the relationship between the net present value (NPV) and the required rate of return (discount rate)?
A) NPV increases as the discount rate increases
B) NPV decreases as the discount rate increases
C) NPV remains the same regardless of the discount rate
D) NPV is unaffected by the discount rate
Which of the following methods would be the most appropriate for a company evaluating multiple projects with varying scales and durations?
A) Payback period
B) Internal rate of return (IRR)
C) Net present value (NPV)
D) Profitability index (PI)
A project’s profitability index (PI) is calculated by dividing:
A) The net present value (NPV) by the initial investment
B) The present value of future cash flows by the initial investment
C) The internal rate of return (IRR) by the cost of capital
D) The total cash inflows by the total cash outflows
If a company uses a 10% cost of capital, and a project has an internal rate of return (IRR) of 15%, which of the following is true?
A) The project should be accepted because its IRR exceeds the cost of capital
B) The project should be rejected because its IRR exceeds the cost of capital
C) The project’s NPV will be zero
D) The project’s payback period is too long
Which of the following capital budgeting methods can be used to evaluate projects of different sizes?
A) Internal rate of return (IRR)
B) Profitability index (PI)
C) Payback period
D) Accounting rate of return (ARR)
Which of the following would most likely result in a higher net present value (NPV) for a project?
A) An increase in the discount rate
B) An increase in the cost of capital
C) An increase in the cash inflows
D) A decrease in the project’s lifespan
Which method of capital budgeting is based on the assumption that cash flows will be reinvested at the internal rate of return (IRR)?
A) Net present value (NPV)
B) Profitability index (PI)
C) Modified internal rate of return (MIRR)
D) Internal rate of return (IRR)
A company has a project with an IRR of 12%. If the company’s required rate of return is 10%, what should be the decision?
A) Accept the project because the IRR exceeds the required rate of return
B) Reject the project because the IRR is lower than the required rate of return
C) Reject the project because the IRR is too high
D) Accept the project because the NPV will be negative
Which of the following capital budgeting methods gives equal weight to all cash flows, regardless of when they occur?
A) Payback period
B) Profitability index (PI)
C) Internal rate of return (IRR)
D) Net present value (NPV)
What does a profitability index (PI) of less than 1.0 mean for a capital budgeting project?
A) The project will not generate sufficient returns to justify its cost
B) The project will generate returns equal to the cost of capital
C) The project will break even
D) The project should be accepted
Which capital budgeting technique calculates the present value of future cash flows by applying a discount rate to those cash flows?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Profitability index (PI)
D) Payback period
Which of the following is the main limitation of the profitability index (PI)?
A) It does not consider the time value of money
B) It is difficult to calculate
C) It assumes equal risk for all projects
D) It cannot be used when projects have different investment sizes
A company evaluates capital budgeting projects with a profitability index (PI) of 1.2, 0.9, and 1.5. Which project should the company accept?
A) The project with a PI of 0.9
B) The project with a PI of 1.5
C) The project with a PI of 1.2
D) Reject all projects because their PI is below 1.0
What is the formula for calculating the net present value (NPV)?
A) NPV = Total inflows – Total outflows
B) NPV = Cash inflows / Cash outflows
C) NPV = (Present value of inflows) – (Initial investment)
D) NPV = IRR – Discount rate
Which capital budgeting method is considered the most reliable for determining whether or not to accept a project?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Profitability index (PI)
Which of the following best describes the modified internal rate of return (MIRR)?
A) It assumes cash inflows are reinvested at the project’s IRR
B) It accounts for the cost of capital and assumes reinvestment at a specified rate
C) It uses the same assumptions as the internal rate of return (IRR)
D) It uses the company’s required rate of return as the discount rate
A company with a cost of capital of 8% is evaluating two projects. Project A has an IRR of 10%, and Project B has an IRR of 7%. What should be the decision?
A) Accept both projects
B) Accept Project A and reject Project B
C) Accept Project B and reject Project A
D) Reject both projects
Which of the following would make a capital budgeting project more likely to be accepted?
A) A decrease in the discount rate
B) An increase in the initial investment
C) A decrease in the expected cash inflows
D) An increase in the required rate of return
A project has a profitability index (PI) of 1.3, an initial investment of $200,000, and expected future cash flows of $260,000. What is the net present value (NPV)?
A) $60,000
B) $52,000
C) $200,000
D) $300,000
Which capital budgeting method is based on the discounting of future cash flows to present value?
A) Payback period
B) Internal rate of return (IRR)
C) Profitability index (PI)
D) Net present value (NPV)
Which of the following statements is true for a capital budgeting project with a positive NPV?
A) The project is expected to destroy value
B) The project should be rejected
C) The project will generate value for the firm
D) The project has an IRR below the cost of capital
Which of the following is an advantage of the internal rate of return (IRR) method over other capital budgeting methods?
A) It provides an exact dollar value of profitability
B) It accounts for the time value of money
C) It is easier to calculate than NPV
D) It does not require a discount rate
If a project’s profitability index (PI) is 0.8, what should be the decision?
A) Accept the project
B) Reject the project
C) The project should be revisited for further analysis
D) Delay the decision
A company’s required rate of return for evaluating projects is 10%. A project has an IRR of 12%. What is the project’s NPV likely to be?
A) Positive
B) Negative
C) Zero
D) Equal to the initial investment
Which of the following capital budgeting methods is most useful for evaluating projects with differing scales of investment?
A) Internal rate of return (IRR)
B) Profitability index (PI)
C) Payback period
D) Net present value (NPV)
Which of the following is a disadvantage of the payback period method?
A) It ignores the time value of money
B) It is complex to calculate
C) It does not account for risk
D) It requires detailed financial projections
Which capital budgeting method requires the most accurate estimation of future cash flows?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Profitability index (PI)
What does the internal rate of return (IRR) represent in a capital budgeting project?
A) The rate of return that results in a zero NPV
B) The cost of capital for the project
C) The expected rate of return from the project’s future cash flows
D) The rate at which cash inflows are reinvested
Which of the following is NOT a typical assumption when using the net present value (NPV) method?
A) Cash flows are reinvested at the cost of capital
B) Cash inflows occur at the end of each period
C) The discount rate is constant over the life of the project
D) The project’s risk profile is similar to the company’s overall risk
A company is evaluating a project with an initial investment of $500,000 and expected annual cash flows of $100,000 for 8 years. If the company’s cost of capital is 10%, what is the NPV of the project?
A) $120,000
B) $180,000
C) $90,000
D) $200,000
Which of the following statements is true for a project with a negative NPV?
A) The project is expected to add value to the company
B) The project’s expected returns exceed the cost of capital
C) The project should be rejected
D) The project’s profitability index is greater than 1.0
In capital budgeting, which method is based on the assumption that all future cash flows are discounted to their present value?
A) Payback period
B) Internal rate of return (IRR)
C) Net present value (NPV)
D) Profitability index (PI)
Which of the following capital budgeting methods does NOT consider the time value of money?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Payback period
D) Profitability index (PI)
If the internal rate of return (IRR) for a project is equal to the required rate of return, what should be the decision?
A) Accept the project
B) Reject the project
C) The decision is ambiguous; further analysis is needed
D) The project’s NPV is zero
A project has a profitability index (PI) of 1.5 and an initial investment of $200,000. What is the present value of future cash inflows?
A) $250,000
B) $300,000
C) $350,000
D) $400,000
A project with a cost of capital of 10% has an internal rate of return (IRR) of 12%. What is the relationship between the IRR and the NPV?
A) The NPV will be positive
B) The NPV will be zero
C) The NPV will be negative
D) The NPV cannot be determined without additional information
Which of the following capital budgeting methods is considered the most conservative?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Profitability index (PI)
What is the main advantage of the internal rate of return (IRR) method?
A) It provides an exact dollar value of profitability
B) It accounts for the time value of money
C) It is easy to calculate
D) It does not require assumptions about the reinvestment rate
A company is deciding between two projects. Project A has an NPV of $300,000, and Project B has an NPV of $150,000. What should be the decision?
A) Accept Project A and reject Project B
B) Accept both projects since both have positive NPVs
C) Reject both projects since the NPVs are too low
D) Accept Project B and reject Project A
Which of the following best describes the net present value (NPV) method?
A) It measures the expected profitability of a project relative to its risk
B) It compares the present value of future cash inflows to the initial investment
C) It determines the payback period for a project
D) It calculates the internal rate of return (IRR) for a project
If a project has a high internal rate of return (IRR) but a low profitability index (PI), what does this indicate?
A) The project is expected to generate high returns relative to the investment
B) The project is not a good investment because the PI is below 1
C) The project will break even
D) The project should be accepted regardless of the PI
Which of the following methods is best for comparing mutually exclusive projects with different sizes and investment amounts?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Profitability index (PI)
D) Payback period
Which of the following is true about the profitability index (PI)?
A) It is the ratio of discounted cash inflows to the initial investment
B) It is the rate of return at which the NPV is zero
C) A PI greater than 1.0 indicates the project is not profitable
D) It does not account for the time value of money
Which of the following is an example of a limitation of the IRR method?
A) It does not take into account the time value of money
B) It assumes that cash flows are reinvested at the IRR
C) It is difficult to calculate for large projects
D) It requires a discount rate
If a company’s cost of capital is 8%, and a project has an IRR of 9%, what does this suggest about the project’s NPV?
A) The NPV will be positive
B) The NPV will be zero
C) The NPV will be negative
D) The project should be rejected
In capital budgeting, which method can be used to compare the profitability of projects with unequal durations?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Profitability index (PI)
D) Equivalent annual cost (EAC)
Which of the following methods is best suited for evaluating projects with different risk profiles?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Profitability index (PI)
A company is evaluating two mutually exclusive projects. Project X has an NPV of $150,000, and Project Y has an NPV of $100,000. Which project should be selected?
A) Project X
B) Project Y
C) Both projects should be accepted
D) Neither project should be accepted
A company is evaluating two independent projects. Project A has an NPV of $50,000, and Project B has an NPV of $30,000. What should be the decision?
A) Accept both projects because both have positive NPVs
B) Accept only Project A
C) Accept only Project B
D) Reject both projects
If a project’s internal rate of return (IRR) is greater than the company’s required rate of return, what is the expected effect on the project’s NPV?
A) The NPV will be zero
B) The NPV will be negative
C) The NPV will be positive
D) The NPV will be zero at the IRR
Which of the following is true about the payback period method?
A) It does not consider the time value of money
B) It is suitable for long-term projects
C) It calculates the NPV of a project
D) It is complex to calculate
What is the most important factor to consider when choosing between mutually exclusive projects with different cash flow patterns?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Payback period
D) Profitability index (PI)
What does the term ‘capital budgeting’ refer to?
A) A method for setting the company’s marketing strategy
B) The process of planning and managing a firm’s long-term investments
C) The process of managing cash flows in the short term
D) A method for budgeting fixed operating expenses
A project requires an initial investment of $500,000 and is expected to generate annual cash inflows of $125,000 for 5 years. If the company’s cost of capital is 8%, what is the NPV of the project?
A) $45,000
B) $30,000
C) $40,000
D) $50,000
Which of the following is NOT a factor that affects the cost of capital in capital budgeting decisions?
A) Risk-free rate
B) Market conditions
C) Size of the project
D) Inflation expectations
If the NPV of a project is positive, the project:
A) Will not provide sufficient returns
B) Should be accepted
C) Has a zero IRR
D) Has a high IRR
Which capital budgeting method evaluates projects based on the total value created per dollar invested?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Profitability index (PI)
D) Payback period
A company’s project has an NPV of $200,000. If the required rate of return is increased, what will likely happen to the NPV?
A) It will increase
B) It will remain the same
C) It will decrease
D) It will become zero
Which of the following is an advantage of using the NPV method over the payback period?
A) It is easier to calculate
B) It considers the time value of money
C) It does not require future cash flow estimates
D) It is more intuitive
Which method considers the opportunity cost of capital when evaluating investments?
A) Payback period
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Profitability index (PI)
In capital budgeting, the net present value (NPV) method assumes that:
A) Cash flows are reinvested at the internal rate of return (IRR)
B) All future cash flows are discounted at the cost of capital
C) Future cash flows occur at the beginning of each period
D) Cash flows are always positive
Which of the following capital budgeting methods considers risk by adjusting the discount rate?
A) Internal rate of return (IRR)
B) Payback period
C) Risk-adjusted discount rate (RADR)
D) Profitability index (PI)
If a project’s internal rate of return (IRR) is greater than the required rate of return, the project:
A) Should be accepted
B) Should be rejected
C) Should be reconsidered based on other methods
D) Will break even
What does a negative NPV imply about a project?
A) The project will increase shareholder wealth
B) The project will decrease shareholder wealth
C) The project has no effect on shareholder wealth
D) The project should be accepted regardless of the NPV
Which of the following capital budgeting methods is most appropriate for projects with different sizes of investments?
A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Payback period
D) Profitability index (PI)
Which of the following is true about the internal rate of return (IRR) method?
A) It assumes that all cash flows are reinvested at the project’s IRR
B) It calculates the future value of cash flows
C) It does not account for the time value of money
D) It always provides a clear decision in case of mutually exclusive projects
If the profitability index (PI) is less than 1.0, the project:
A) Should be accepted
B) Should be rejected
C) Has an IRR greater than the required rate of return
D) Will generate a positive NPV
Which of the following is true when a project’s payback period is less than the company’s desired payback period?
A) The project should always be accepted
B) The project is considered riskier
C) The project has a higher likelihood of breaking even quickly
D) The project will likely produce a higher NPV
When evaluating a capital project, which of the following is an important consideration when calculating the net present value (NPV)?
A) The company’s marketing strategy
B) The time horizon of the project
C) The present value of all future liabilities
D) The company’s overall debt structure
Which of the following methods can be used to compare two projects with different durations and cash flow patterns?
A) Internal rate of return (IRR)
B) Net present value (NPV)
C) Equivalent annual cost (EAC)
D) Payback period