Capital Budgeting Techniques

What is the definition of capital budgeting according to Garrison and Noreen (2005)?

• Capital budgeting is known as investment appraisal

• Capital budgeting is an investment analysis done by managers to determine which proposal has the best return in future cash flows

• Capital budgeting is defined as the best option of financing for the long term investments decisions

• None of the answers

What is the net present value?

• The difference between the present value of cash inflows and the present value of cash outflows over a period of time.

• is the value of a current asset at a future date based on an assumed rate of growth. 

• is the current value of a future sum of money or stream of cash flows given a specified rate of return

How many capital budgeting decision criteria?

• 1

• 3

• 5

• 6

Capital budgeting methods are often divided into two classifications: project screening and project ranking. Which one of the following is considered a ranking method rather than a screening method?

• Accounting rate of return

• Net present value

• Profitability index

• Time-adjusted rate of return

 Which of the following statements is false about long-term assets?

• Long-term assets are committed for extended periods of time.

• Acquiring long-term assets creates significant financial risks for organizations.

• Acquiring long-term assets creates technological risks for organizations.

• Flexible budgeting is the primary tool that planners use in evaluating the financial desirability of long-term assets.

What is secondary data?

• is the information that is collected by individuals, agencies and institutions other than by the researcher.

• is the data collected by researchers for conducting their own study.

• is the type of qualitative information which helps to label the variables without providing the numerical value.

•  is a type of data that follows a natural order.

Which one is NOT a technique used to make a capital budgeting decision?

• Net present value

• Internal rate of return

• Payback period

• Time value of money

Which mutually exclusive project would you select, if both are priced at P 1000 and your discount rate is 15%; Project A with three annual cash flows of P 1000, or Project B, with three years of zero cash flow followed by three years of P 1,500 annually?

• Project A

• Project B

• The IRRs are equal, hence you are indifferent

• The NPVs are equal, hence you are indifferent

Although it ignores the time value of money, what is the most common method used in practice for capital budgeting?

• Internal rate of return

• Net present value

• Payback

• Accounting rate of return

Capital budgeting techniques are least likely to be used in evaluating the

• Adoption of a new method of allocating non-traceable costs to product lines

• Design and implementation of a major advertising program

• Acquisition of a new aircraft by a cargo company.

• Trade for a star quarterback by a football team