CPFM Capital Budgeting Decisions 2

Question 1

A project requires $50,000 today and returns $60,000 in one year. At a 10% discount rate, what is its NPV?

Accepted Answer

$5,454

Answer

$10,000

Answer

$4,545

Answer

$0

Question 2

Which method ignores the time value of money entirely?

Accepted Answer

Payback period

Answer

Net present value

Answer

Internal rate of return

Answer

Profitability index

Question 3

When NPV and IRR rank two mutually exclusive projects differently, which method should generally prevail?

Accepted Answer

NPV, because it measures dollar value added

Answer

IRR, because it shows a percentage

Answer

Payback, because it is conservative

Answer

Accounting rate of return

Question 4

A capital project has an IRR of 12% and the firm's cost of capital is 14%. The project should be:

Accepted Answer

Rejected

Answer

Accepted

Answer

Deferred indefinitely

Answer

Accepted only if NPV is negative

Question 5

The profitability index of a project equals:

Accepted Answer

PV of future cash flows divided by initial investment

Answer

NPV divided by initial investment

Answer

Initial investment divided by annual cash flow

Answer

IRR divided by cost of capital

Question 6

Which cash flow is irrelevant in a capital budgeting decision?

Accepted Answer

A sunk cost already incurred

Answer

Incremental operating cash flow

Answer

Opportunity cost of a building

Answer

Changes in net working capital

Question 7

A higher discount rate applied to a conventional project will:

Accepted Answer

Decrease NPV

Answer

Increase NPV

Answer

Leave NPV unchanged

Answer

Always make NPV positive