Business Finance W7

What is Capital Budgeting primarily concerned with?

• The process of managing short-term investments

• The process of selecting long-term investments, primarily plant and equipment

• The process of choosing stocks and bonds for investment

• The process of budgeting for a company's operational expenses

Conceptually, how does Capital Budgeting differ from an investment in a stock or bond?

• It is conceptually the same as investing in stocks or bonds

• It is only concerned with short-term gains

• It involves more risk than investing in stocks or bonds

• It is a quicker process than investing in stocks or bonds

What are the two main components of cash flow mentioned in the learning material?

• The cash outflow to make the investment and the cash inflow generated by the investment

• The cash inflow to make the investment and the cash outflow generated by the investment

• The initial investment amount and the return on investment

• The profit generated by the investment and the operational expenses

What does the Net Present Value (NPV) method involve in capital budgeting?

• Sum of all future cash inflows

• Present value of cash inflows plus cash outflows

• Present value of cash inflows minus cash outflows

• Future value of cash inflows minus cash outflows

What is the Internal Rate of Return (IRR)?

• The discount rate that makes the NPV of an investment zero

• The rate at which an investment doubles in value

• The interest rate charged by banks for loans

• The rate of return required by investors to break even

What does NPV stand for in the context of capital budgeting?

• Net Present Value

• Net Private Valuation

• New Project Valuation

• Net Profitable Venture

According to the NPV technique of capital budgeting, what should be done if the NPV is greater than 0?

• The investment should be reconsidered.

• The investment should be accepted.

• The investment should be rejected.

• Additional information is needed.

What is the decision criterion for an investment if the NPV is less than 0?

• Accept the investment

• Reject the investment

• Increase the investment

• Postpone the investment

What does the IRR technique in capital budgeting equate?

• The future value of cash inflows and outflows

• The present value of cash inflows and the cash outflows

• The net present value to zero

• The cost of capital to the rate of return

In the IRR technique, if the rate of return (r) is greater than or equal to the cost of capital (k), what should be the decision regarding the investment?

• Postpone the investment

• Accept the investment

• Reject the investment

• Re-evaluate the investment