C2-Capital Budgeting Techniques follow slides

What is the relationship between benefits from investment and costs for investment?

• Exponential

• No relationship

• Inversely proportional

• Directly proportional

Which of the following is not a capital budgeting technique?

• Accounting Rate of Return (ARR)

• Operating Leverage

• Payback Period (PP)

• Profitability Index

What is the formula for Accounting Rate of Return (ARR)?

• Total accounting profit / Total investment value

• Total investment value / Total accounting profit

• Average investment value / Average after tax accounting profit

• Average after tax accounting profit / Average investment value

Which project should be accepted based on the Accounting Rate of Return (ARR) if the threshold is 15%?

• Project A

• Project B

• Both projects

• Neither project

What is the formula for Net Present Value (NPV)?

• (CFt - CF0) / r

• (CFt - CF0)

• (CFt - CF0) / n

• CFt / (1+r)^t

What does the Internal Rate of Return (IRR) represent?

• The discount rate at which the net present value of the investment is zero

• The total profit generated by the investment

• The total cost of the investment

• The total revenue generated by the investment

What is the Profitability Index (PI) also known as?

• Return on Investment (ROI)

• Benefit/Cost Ratio

• Cost Efficiency Index

• Investment Efficiency Ratio

What is the formula for Degree of Operating Leverage (DOL)?

• % Change in Operating Income * % Change in Sales

• % Change in Sales * % Change in Operating Income

• % Change in Sales / % Change in Operating Income

• % Change in Operating Income / % Change in Sales

What does the EBIT break-even point indicate?

• The quantity at which the company reaches maximum profitability

• The quantity at which the company breaks even in terms of revenue and costs

• The quantity at which the company faces the highest level of risk

• The quantity at which every investment alternative can produce one level of EBIT

What is the importance of the breakeven point analysis?

• To assess the risk associated with the investment

• To calculate the total profit generated by the investment

• To determine the number of units or dollars of revenue needed to cover total operating costs

• To evaluate the long-term financial performance of the company