MCQ on Capital Budgeting

Which method is commonly used to compare projects with unequal lives?

• Payback Period

• Accounting Rate of Return

• Equivalent Annual Annuity (EAA)

• Profitability Index

Which of the following best explains the conflict between NPV and IRR?

• It occurs when discount rate equals IRR

• It occurs when projects are independent

• It occurs due to differences in project scale and timing of cash flows

• It never occurs in real life

In capital rationing, the primary constraint is:

• Lack of positive NPV projects

• Limited availability of capital

• High operating leverage

• Excessive working capital

Which method is most suitable under capital rationing?

• IRR

• NPV

• Profitability Index (PI)

• Payback Period

Sensitivity analysis measures:

• The variability of NPV to changes in one input at a time

• Probability distribution of all inputs

• The correlation between two projects

• The break-even IRR

Which of the following statements about replacement decisions is correct?

• Replacement is never optimal when the existing asset still generates positive cash flow

• Replacement occurs when marginal cost of keeping the old asset exceeds cost of the new one

• Replacement decisions are based on sunk cost

• Replacement is decided by the book value of the old asset

Expected NPV is computed as:

• Sum of discounted inflows minus outflows

• Weighted average of NPVs under different scenarios

• Average IRR of multiple projects

• NPV under the most likely scenario only

A project with higher sensitivity to sales revenue is:

• Less risky

• More risky

• Independent of risk

• Has no impact on decision

When two projects have unequal lives and must be repeated indefinitely, which method is appropriate?

• EAA or Common Life Approach

• Payback

• Modified IRR

• Accounting Rate of Return

Which of the following is not a limitation of sensitivity analysis?

• Considers one variable at a time

• Ignores interdependencies among variables

• Considers probability distribution of variables

• Does not give a clear decision rule