Capital Budgeting Flashcards
6 cards from real Financial Management for Project Managers practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Capital Budgeting flashcards as text
Depreciation is relevant to capital budgeting primarily because:
Answer: It reduces taxable income, creating a tax shield
Depreciation reduces taxable income, which lowers the tax liability and creates a non-cash tax shield that improves after-tax cash flows.
The discount rate used in NPV analysis for a project is most commonly the:
Answer: Weighted Average Cost of Capital (WACC)
WACC represents the blended cost of all capital sources and is the standard hurdle rate used to discount project cash flows in NPV analysis.
An incremental cash flow in capital budgeting refers to:
Answer: Cash flows that occur only if the project is undertaken
Incremental cash flows are the additional cash flows that result specifically from accepting a project, excluding sunk costs and including opportunity costs.
Which capital budgeting term describes the minimum acceptable rate of return on a project investment?
Answer: Hurdle rate
The hurdle rate is the minimum rate of return required by management before approving a capital investment project.
Sunk costs should be treated in capital budgeting decisions by:
Answer: Excluding them because they are irrelevant to future decisions
Sunk costs are past expenditures that cannot be recovered and therefore should not influence future capital budgeting decisions.
The Modified Internal Rate of Return (MIRR) addresses which key weakness of traditional IRR?
Answer: It assumes reinvestment at the project's own IRR rather than the cost of capital
MIRR corrects the reinvestment rate assumption by using the cost of capital as the reinvestment rate, making it more realistic than traditional IRR.