Activity 6 - MAKING INVESTMENT DECISIONS - Capital Budgeting

Which capital budgeting technique measures the time required to recover the initial investment from the cash inflows generated by a project?

• Net Present Value (NPV)

• Payback Method

• Internal Rate of Return (IRR)

• Profitability Index

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

• The average annual profit of a project

• The present value of all cash inflows minus the present value of all cash outflows

• The time taken to recover the initial investment

• The rate at which the project breaks even

Which of the following best describes the Internal Rate of Return (IRR)?

• The discount rate that makes the NPV of a project zero

• The time taken to recover the initial investment

• The total profit earned by a project

• The average rate of return over the project's life

Which of the following is an advantage of the Payback Method?

• Considers the time value of money

• Simple and easy to understand

• Accounts for all cash flows over the project's life

• Always leads to the best investment decision

If a project has a positive NPV, what does this indicate?

• The project should be rejected

• The project is expected to add value to the firm

• The project will break even

• The project has a payback period of zero

Which method ignores the time value of money?

• Net Present Value (NPV)

• Internal Rate of Return (IRR)

• Payback Method

• Discounted Payback Method

What is the main limitation of the Payback Method?

• It is too complex to calculate

• It ignores cash flows after the payback period

• It always overestimates project value

• It requires a high discount rate

Which of the following is true when comparing IRR and NPV?

• IRR always gives the same decision as NPV

• NPV is preferred when projects are mutually exclusive

• IRR considers the scale of investment better than NPV

• NPV ignores the time value of money

If the IRR of a project is greater than the required rate of return, what should be done?

• Reject the project

• Accept the project

• Recalculate the IRR

• Ignore the project

Which of the following is NOT a capital budgeting technique?

• Payback Method

• Net Present Value (NPV)

• Internal Rate of Return (IRR)

• Depreciation Method