Capital Budgeting - Multiple Choice Questions
1. …………… is the allocation of investment funds to long-term real assets
a. Capital Budgeting
b. Economical Budgeting
c. Capital Structuring
d. Capital Financing
e. Capital Managing
2. In capital Budgeting, the entire goal is to find projects whose cash inflows
have a greater ……………………………. Than the funds that are to be
invested
a. Present Value
b. Marginal rate of return
c. Incremental rate of return
d. Economical rate of return
e. Deferred value
3. NPV = PV of cash inflows …………………. PV of investment
a. b. +
c. x
d. :
e. None of the above
4. Projects with a present value of cash inflows that exceed the present value of
the investment are said to have a(n) ……………………….net present value.
a. excessive
b. negative
c. positive
d. transitive
e. feasible
5. In capital budgeting, the investment includes ………….. of leaving the project
in working order
a. 10 percent
b. 20 percent
c. 30 percent
d. half
e. the full cost
6. In general, the ……………….. value of all gods already on hand that are used
as part of an investment should be included in the cost of the investment
a. market
b. book
c. historical
d. future
e. extrinsic
7. A cost that has been incurred previously that has no future value is known as
a(n) ……………cost
a. lost
b. sunk
c. past
d. dead
e. accrued
8. The capital budgeting analysis should consider only the ………………. Cash
flows of an investment, those cash flows that differ if the investment is
undertaken
a. extraordinary
b. accrued
c. incremental
d. intrinsic
e. extrinsic
9. Typically, the most important incremental cash flow is the ………… operating
cash flow generated by the project
a. After-tax
b. Before-tax
c. Sunk
d. Negative
e. Positive
10. ………. is reduction in accounting earnings intended to reflect the reduction in
value of an income-producing asset
a. the investment tax credit
b. depreciation
c. the reduced rate of return
d. appreciation
11. Depreciation tax shield = tax rate ……………………… deprecation expense
a. +
b. c. :
d. x
e. None of the above
12. The value of an investment depends on the …………………… value of all
cash flows associated with the investment
a. present
b. future
c. market
d. net future
e. economic
13. Which of the following statements about the internal rate of return is false
a. The higher the IRR, the higher the return being earned on the
investment funds
b. If there are periods with negative cash flows, there may be more than
one IRR
c. In general, to find the IRR of a sequence of cash flows, we can use
trial-and-error, a financial calculator, or a computer
d. The discount rate that produces the highest NPV is, by definition, the
IRR
e. Following the IRR rule for normal projects gives the same accept or
reject decision as the NPV rule
14. The best way to analyse a capital budgeting decision is to use the ………….
a. NPV rule
b. Profitability index
c. Internal rate of return
d. Payback period
e. ARR (Return on investment)
15. The ………………… is usually calculated by dividing after-tax accounting
profits by the investment
a. NPV rule
b. Profitability index
c. Internal rate of return
d. Payback period
e. ARR (Return on investment)
16. The time it takes for the sum of the future cash flows from a project to equal
the amount of the initial investment is called the .……………. Period.
a. investment
b. payback
c. positive return
d. constructive return
e. positive operating
17. which of the following statement about payback period is false?
a. The payback period is the time it takes for the sum of the future cash
flows to equal the amount of the initial investment
b. The payback period neglects the cash flows that occur after the
payback period
c. The payback criterion does not adequately consider the timing of the
cash flows
d. Payback has long been a very popular decision criterion for capital
budgeting
e. The payback rule is to prefer those projects with the longer payback
period
18. The profitability index can be calculated by …………….. the PV of cash
inflows …………… the PV of investment outlays
a. Dividing; by
b. Multiplying; by
c. Adding; to
d. Subtracting; from
e. None of the above
19. A project requires an initial investment of £3,000 and has a discount rate of
15 percent. The cash flows of this project are as follows
Year
PV @ 15%
0
1
2
3
4
-£3,000
£1,200
£ 1,200
£880
£550
Calculate the projects NPV, and make a recommendation for acceptance or rejection
a.
b.
c.
d.
e.
£3,830; accept
-£830; reject
- £156; reject
-£3,830; reject
£5,750; accept
20. A project requires an initial investment of £15,000 and has a discount rate of
12 percent. The cash flows of this project are as follows:
Year
PV @ 12 %
0
£6,000
1
£5,000
2
£3,000
3
£1,500
4
£550
Calculate the NPV, and make a recommendation for acceptance or rejection
a.
b.
c.
d.
e.
£15,500; accept
- £15,500; reject
-£2,568; reject
-£500; reject
£ 30,500; accept
21. A project with only one sign change in its cash flow is called a
…………………. project
a. normal
b. regular
c. constant
d. good
e. steady
22. In general, the maximum possible number of positive IRRs for a project is
equal to the ……………
a. Maximum possible numbers of negative IRRs
b. Number of signs changes in cash flows
c. Number of years in the project’s life
d. Discount rates minus the highest NPV
e. Highest NPV minus the discount rate
23. We can find the IRR of a project by forcing NPV to equal ………………, then
solving for the ………………..
a. Discount rate; cash flows
b. Discount rate; IRR
c. One; IRR
d. Zero; discount rate
e. The cash flows; discount rate
24. You find the IRR of your project to be 32.50. Which of the following sets of
discount rates would allow you always to accept the project?:
a. 20, 40, 30
b. 10, 15, 40
c. 30, 40, 50
d. 10, 20, 30
e. 15, 25, 35
25. The NPV ………………. Is a graphical representation of the NPV of a project
for various discount rates.
a. graph
b. profile
c. chart
d. configuration
e. analysis
26. the discount rate at which the NPV profile crosses the horizontal axis is
exactly the ……………… of the project
a. acceptance border
b. discount rate
c. IRR
d. NPV
e. Maximum cash flow
27. For every high discount rates, the NPV profile approaches …………..
a. Zero, because PVs of cash flows are increasing
b.
c.
d.
e.
Its maximum point
– I, because the PV of each future cash flow is increasing
–I, because the PV of each future cash flow is diminishing
Infinity
28. A project you are considering requires an investment of £2,000, and will pay
out £200 a year forever. What is the project’s payback period?
a. It doesn’t have one
b. 1 year
c. 1 month
d. 10 years
e. 10 months
29. A project you are considering requires an investment of £2,000, and will pay
out £100 a year forever, what is the project’s IRR?
a. 0.02
b. 0.05
c. 0.2
d. 0.5
e. 0.1
30. The payback period of an investment is 14 years and this investment’s cash
flows constitute a perpetuity. Given this information, the IRR of this project is
………….. percent.
a. 3.98
b. 2.22
c. 9.45
d. 8.12
e. 7.14
31. If the PI exceeds ………………….. when the cash flows are discounted at the
appropriate rate, then the project should be ………………….
a. 0; accepted
b. 0; rejected
c. 1; rejected
d. 1; accepted
e. 1.0; revaluated
32. Determine the total investment cost a firm should consider in a construction
project in evaluating costs of;
Land for project site (paid £150,000; market value £450,000; night security to
protect vacate land before it was utilised (£45,000)l night security for construction
site (£30,000); work crew to clear land for construction crew (£8,000); building
materials (£150,000); construction permits (£10,000).
a. £393,000
b.
c.
d.
e.
£383,000
£693,000
£648,000
£638,000
33. A nursery sells 10,000 plants a year at £5 a plant. Total costs are $4 per
plant. The store pays income taxes at a rate of 30 percent. The store’s aftertax operating cash flows are £ ……………
a. 10,000
b. 7,000
c. 3,000
d. 70,000
e. 0
34. The after-tax cash flows with and without the effect of depreciation differ by
…………..
a. Tax rate times the cumulative cash flows
b. Depreciation tax shield times depreciation
c. Depreciation tax shield times cumulative csh flows
d. Tax rate times the depreciation
e. Depreciation times the cumulative cash flow
35. All of the following are components of working capital except ……………..
a. Cash balances
b. Inventory
c. Accounts receivable
d. Past-due accounts receivable
e. Notes payable
36. A firm is selling £10,000 worth of a product per year and incurring £7,000 in
costs to do so. The firm pays taxes at a 35 percent rate and shows
depreciation expense of £350 a year. The firm’s depreciation tax shield is £
…………..
a. 87.50
b. 1,277.50
c. 750
d. 927.50
e. 662.50
37. A firm sells 250,000 units of a product each year for £10 a unit. It costs the
firm £500,000, a quarter to manufacture the product. If the firm pays taxes t a
rate of 20 percent, its annual after-tax operating cash flows are £ …………..
a. 500,000
b. 150,000
c. 350,000
d. 2,000,000
e. 300,000