MCQ on Capital Budgeting Techniques

Which of the following is NOT a capital budgeting technique?

• Net Present Value (NPV)

• Payback Period

• Internal Rate of Return (IRR)

• Current Ratio

Which of the following best describes Net Present Value (NPV)?

• The discount rate that makes the NPV zero

• The present value of cash inflows minus initial investment

• The ratio of present value of inflows to outflows

• The time required to recover the initial investment

Which of the following measures the sensitivity of EBIT to changes in sales?

• Degree of Operating Leverage

• Degree of Financial Leverage

• Break-even EBIT

• Contribution Margin Ratio

Break-even point is the level of sales at which:

• Total cost equals fixed cost

• Contribution margin equals variable cost

• Total revenue equals total cost

• Total revenue equals fixed cost

Which of the following is an advantage of using NPV over Payback Period?

• Simplicity

• Considers time value of money

• Easier to calculate

• Ignores cash flows after payback

Which of the following is true about IRR?

• It discounts cash flows at the cost of equity

• It is the discount rate that makes NPV zero

• It always agrees with Payback Period

• It does not consider time value of money

The formula for the Degree of Operating Leverage (DOL) at a given sales level is:

• EBIT / Contribution Margin

• Contribution Margin / EBIT

• Sales / EBIT

• Fixed Cost / Contribution Margin

A higher operating leverage implies:

• Lower business risk

• Higher fixed costs

• Lower contribution margin

• Lower break-even point

Which method ignores the time value of money?

• NPV

• IRR

• Payback Period

• Discounted Payback Period

Two projects have different operating leverage: Project A: Fixed costs = $100,000; Variable cost per unit = $20. Project B: Fixed costs = $60,000; Variable cost per unit = $30. Selling price per unit = $50 for both. At what sales level (units) will the EBIT of both projects be equal (Break-even EBIT)?

• 1,000 units

• 1,333 units

• 2,000 units

• 4,000 units