Capital Budgeting Quiz

What is capital budgeting?

• Managing short-term assets and liabilities

• Evaluating and ranking potential expenditures or investments

• Calculating the company's profit margins

• Managing working capital only

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

• Independent project

• Mutually exclusive project

• Dependent project

• Recurring project

The Payback Period (PP) method measures:

• The total profit generated over the project's lifetime

• The number of years required to recover the initial investment

• The present value of future cash flows

• The project's internal rate of return

A major drawback of the Payback Period method is that it:

• Considers the time value of money

• Ignores cash flows beyond the payback period

• Requires complex calculations

• Overestimates the risk of investment

The Net Present Value (NPV) method:

• Compares the present value of cash inflows with the initial investment

• Ignores the time value of money

• Is not useful for investment decisions

• Focuses only on short-term returns

A project should be accepted using the NPV method if:

• NPV is negative

• NPV is zero

• NPV is positive

• NPV is less than the required rate of return

The Internal Rate of Return (IRR) is:

• The rate at which NPV is maximized

• The discount rate that makes NPV equal to zero

• Always equal to the cost of capital

• The average return over the project's life

If IRR is greater than the company's cost of capital, the project should be:

• Accepted

• Rejected

• Delayed for further analysis

• Ignored

Which of the following is an advantage of the IRR method?

• It ignores the time value of money

• It is simpler than the payback period

• It considers the time value of money and project cash flows

• It does not require a discount rate

The NPV and IRR methods both:

• Ignore cash flows beyond the payback period

• Consider the time value of money

• Always give the same project ranking

• Are less accurate than the payback period method