Capital Budgeting Quiz

What is the primary objective of capital budgeting decisions?

• Minimize company expenses

• Maximize shareholder value

• Increase employee satisfaction

• Reduce market competition

Which of the following is NOT a type of capital budgeting project?

• Independent project

• Mutually exclusive project

• Contingent project

• Overhead project

Which of the following is excluded when identifying relevant cash flows for a project?

• Opportunity costs

• Sunk costs

• Incremental cash flows

• Working capital recovery

The formula for Net Present Value (NPV) is:

• Present Value of Cash Inflows × Discount Rate

• Present Value of Cash Inflows − Present Value of Cash Outflows

• Total Cash Inflows − Total Cash Outflows

• Cash Flow After Taxes ÷ Opportunity Cost of Capital

What does the Payback Period measure?

• Total profitability of a project

• Time to recover the initial investment

• Net increase in shareholder value

• Time value of money for cash flows

What is the decision rule for accepting a project based on the Profitability Index (PI)?

• PI > 0

• PI = 1

• PI < 0

• PI > 1

Which method assumes reinvestment at the opportunity cost of capital instead of the IRR?

• Payback Period

• Modified Internal Rate of Return (MIRR)

• Profitability Index (PI)

• Net Present Value (NPV)

What is the key drawback of the Internal Rate of Return (IRR) method?

• Ignores the time value of money

• Does not provide a true measure of profitability

• May lead to conflicting decisions for mutually exclusive projects

• Requires the use of inflation-adjusted cash flows

Which of the following is an example of a terminal cash flow?

• Depreciation expense

• Sale of machinery at the end of a project

• Annual increase in electricity costs

• Initial investment in working capital

What does Equivalent Annual Cost (EAC) help to evaluate?

• Terminal value of a project

• Total cash inflows over a project's life

• Cost of operating assets with different lives

• Incremental cash flow of a project