Chapter VI: Capital Budgeting Techniques

What does capital budgeting help companies decide?

• Which short-term projects to invest in

• Which long-term projects to invest in

• Which assets to sell

• Which employees to hire

What does the Net Present Value (NPV) method do?

• Compares revenues to expenses

• Discounts future cash flows to the present value

• Estimates the cost of capital

• Evaluates market trends

Which capital budgeting method considers the time value of money?

• Payback period

• Return on Investment (ROI)

• Net Present Value (NPV)

• Profitability Index

What does the payback period method calculate?

• The total profit from an investment

• The time it takes to recover the initial investment and ignores the time value of money

• The rate of return on investment

• The discount rate for cash flows

What is the internal rate of return (IRR)?

• The rate of return on all investments

• The discount rate that makes the NPV zero

• The average return on equity

• The interest rate on loans

What is the purpose of the profitability index (PI)?

• To calculate total investment costs

• To rank projects by profitability

• To determine project timelines

• To evaluate market risks

When should a project be accepted based on NPV?

• If its NPV is negative

• If its NPV is positive

• If its NPV is zero

• If its NPV is less than the cost of capital

What is the hurdle rate?

• The maximum rate of return on a project

• The minimum required rate of return on a project

• The average return on equity

• The rate used for cash flow calculations

Capital budgeting decisions typically affect a company’s:

• Short-term investments

• Long-term investments

• Daily operations

• Employee salaries

What is capital budgeting?

• The process of selling long-term assets

• The process of evaluating and selecting long-term investments

• The analysis of short-term cash flows

• The management of daily expenditures