Chapter 10

Question 1

What is capital budgeting?

Answer 1

Capital budgeting is the process of planning and managing a company’s long-term investments.

Question 2

True or False: Capital budgeting only considers short-term projects.

Answer 2

False

Question 3

What is the primary goal of capital budgeting?

Answer 3

The primary goal is to maximize shareholder value.

Question 4

Fill in the blank: The capital budgeting process involves the evaluation of _____ and _____ projects.

Answer 4

long-term, capital

Question 5

Which method is commonly used to evaluate capital projects?

Answer 5

Net Present Value (NPV) method

Question 6

What does NPV stand for?

Answer 6

Net Present Value

Question 7

True or False: A positive NPV indicates that a project is expected to generate a profit.

Answer 7

True

Question 8

What is the Discount Rate?

Answer 8

The discount rate is the rate used to calculate the present value of future cash flows.

Question 9

Multiple Choice: Which of the following is NOT a capital budgeting technique? A) NPV B) IRR C) ROI D) SWOT

Answer 9

D) SWOT

Question 10

What does IRR stand for?

Answer 10

Internal Rate of Return

Question 11

True or False: The IRR is the discount rate that makes the NPV of a project equal to zero.

Answer 11

True

Question 12

Fill in the blank: The _____ Payback Period is the time it takes for the cumulative cash flows to equal the initial investment.

Answer 12

Simple

Question 13

What is the main limitation of the Payback Period method?

Answer 13

It ignores the time value of money.

Question 14

Multiple Choice: Which method considers the time value of money? A) Payback Period B) NPV C) Simple Payback D) None of the above

Answer 14

B) NPV

Question 15

What is a hurdle rate?

Answer 15

A hurdle rate is the minimum acceptable return on an investment.

Question 16

True or False: The profitability index is calculated as the present value of future cash flows divided by the initial investment.

Answer 16

True

Question 17

Fill in the blank: The _____ method compares the present value of cash inflows to the initial investment.

Answer 17

Profitability Index

Question 18

What is meant by ‘sunk cost’ in capital budgeting?

Answer 18

A sunk cost is a cost that has already been incurred and cannot be recovered.

Question 19

Multiple Choice: Which of the following is a qualitative factor in capital budgeting? A) Cash flows B) Risk C) NPV D) IRR

Answer 19

B) Risk

Question 20

Fill in the blank: The _____ approach to capital budgeting focuses on the cash flows generated by a project.

Answer 20

Cash Flow

Question 21

True or False: Capital rationing occurs when a company has unlimited funds for investment.

Answer 21

False

Question 22

What is the main objective of sensitivity analysis in capital budgeting?

Answer 22

To assess how changes in key assumptions affect project outcomes.

Question 23

Fill in the blank: The _____ method evaluates how changes in cash flows affect the NPV.

Answer 23

Sensitivity

Question 24

What does scenario analysis involve?

Answer 24

Evaluating the impact of different scenarios on project outcomes.

Question 25

Multiple Choice: Which of the following is a common risk in capital budgeting? A) Market risk B) Operational risk C) Financial risk D) All of the above

Answer 25

D) All of the above

Question 26

What is the purpose of a capital budgeting proposal?

Answer 26

To outline the costs and benefits of a proposed project.

Question 27

True or False: The cost of capital is the minimum return that a company must earn on its investments.

Answer 27

True

Question 28

What is the weighted average cost of capital (WACC)?

Answer 28

WACC is the average rate of return a company is expected to pay to its security holders.

Question 29

Fill in the blank: The _____ method accounts for the timing of cash flows in capital budgeting.

Answer 29

Discounted Cash Flow

Question 30

Multiple Choice: Which of the following is NOT a factor in determining the cost of capital? A) Debt levels B) Market conditions C) Management style D) Equity levels

Answer 30

C) Management style

Question 31

What is the relationship between risk and return in capital budgeting?

Answer 31

Higher risk projects generally require higher returns.

Question 32

Fill in the blank: The _____ technique allows for the comparison of different investment opportunities.

Answer 32

NPV

Question 33

True or False: The capital budgeting process is a one-time event.

Answer 33

False

Question 34

What is the difference between independent and mutually exclusive projects?

Answer 34

Independent projects can be accepted or rejected without affecting others, while mutually exclusive projects compete against each other.

Question 35

Fill in the blank: A project with a higher _____ is generally preferred in capital budgeting.

Answer 35

IRR

Question 36

What is the significance of the payback period?

Answer 36

It indicates how quickly an investment can be recovered.

Question 37

Multiple Choice: Which method provides the most comprehensive analysis of a project? A) Payback Period B) NPV C) IRR D) Profitability Index

Answer 37

B) NPV

Question 38

What is capital expenditure?

Answer 38

Capital expenditure is the funds used by a company to acquire or upgrade physical assets.

Question 39

Fill in the blank: In capital budgeting, cash flows should be considered on a _____ basis.

Answer 39

after-tax

Question 40

True or False: All cash flows related to a project should be included in the capital budgeting analysis.

Answer 40

True

Question 41

What does the term 'incremental cash flows' refer to?

Answer 41

Incremental cash flows are the additional cash flows generated by a project.

Question 42

Fill in the blank: The _____ approach considers the total cost of a project including all associated costs.

Answer 42

Comprehensive

Question 43

What is the importance of the capital budgeting decision?

Answer 43

It significantly impacts the long-term financial health and growth of a company.