Deck 6: Capital Budgeting and Cash Flows

Question 1

Capital budgeting is about:

A) the search for the best capital projects.
B) the search for projects with the least costs.
C) the search for the next best alternative projects.
D) all of the above.

Answer 1

the search for the best capital projects.

Question 2

The opportunity cost of capital is defined as:

A) the return that is lost on investing in assets.
B) the return that an investor gives up when their money is invested in one asset rather than the best alternative asset.
C) the return that is ultimately recouped within the lifetime of the project.
D) all of the above.

Answer 2

the return that an investor gives up when their money is invested in one asset rather than the best alternative asset.

Question 3

One of the key advantages of using the NPV is the use of a discounted cash flow valuation technique that:

A) adjusts for the time value of money.
B) ignores the time value of money.
C) minimises expenses.
D) none of the above.

Answer 3

adjusts for the time value of money.

Question 4

If the IRR > cost of capital, a project should be:

A) rejected.
B) accepted.
C) further analysed.
D) none of the above.

Question 5

A post-audit review is:

A) an audit of the profits and losses involved in projects.
B) an audit to compare actual project results with the projected results.
C) an audit of the condition of the assets at the end of the project.
D) none of the above.

Question 6

Capital budgeting is:

A) present looking.
B) forward looking.
C) backward looking.
D) none of the above.

Question 7

Incremental capital expenditure is defined as:

A) the investments in short term assets property, plant and equipment and other long term assets that must be made if a project is pursued.
B) the investments in property, plant and equipment and other long term assets that must be made if a project is pursued.
C) the investments in property, plant and equipment and other long term assets that must be made if a project is discontinued.
D) none of the above.

Question 8

Incremental depreciation and amortisation are:

A) excluded at the end of a project.
B) charges that are associated with a project.
C) charges that are ignored in a project.
D) none of the above.

Question 9

Which statement is true?

A) Past FCF should be used for each year of the life of the project.
B) Expected FCF should be used for each year of the life of the project.
C) Expected FCF should be not used for each year of the life of the project.
D) None of the above.

Question 10

In an NPV analysis, FCFs are:

A) ignored.
B) discounted.
C) not discounted.
D) none of the above.

Question 11

Sunk cost are:

A) Past investments that are irrelevant.
B) Past investments that are relevant.
C) Present investments that are relevant.
D) Present investments that are irrelevant.