Deck 8: Capital Budgeting

Question 1

Which of the following is the number of years required to recover the initial capital investment of an organization?

A) Payback period
B) Discounted payback period
C) Net present value
D) Internal rate of return
E) Modified internal rate of return

Answer 1

A

Question 2

Which of the following is a discounted cash flow method that compares the present value of a project's future cash flows to its initial costs?

A) Payback period
B) Discounted payback period
C) Net present value
D) Internal rate of return
E) Modified internal rate of return

Answer 2

C

Question 3

As facility projects can often lead to non-normal cash flows, it is recommended that which of the following be used when developing a capital budget?

A) Payback period
B) Discounted payback period
C) Net present value
D) Internal rate of return
E) Modified internal rate of return

Answer 3

E

Question 4

Which of the following is the discount rate that makes the present value of the estimated cash flows equal to the initial cost of the investment?

A) Payback period
B) Discounted payback period
C) Net present value
D) Internal rate of return
E) Modified internal rate of return

Question 5

Using this method of capital budgeting, expected cash flows are discounted by the project's initial cost of capital to determine when the project will break even.

A) Payback period
B) Discounted payback period
C) Net present value
D) Internal rate of return
E) Modified internal rate of return

Question 6

Which capital budgeting method is preferred by most managers as it analyzes cash flows rather than net earnings?

A) Payback period
B) Discounted payback period
C) Net present value
D) Internal rate of return
E) Modified internal rate of return

Question 7

Which of the following is the final step in the capital budgeting process?

A) Conduct a post-audit analysis
B) Select the capital budgeting method
C) Determine the incremental cash flow of a project
D) Determine the initial cost of the project
E) None of the above

Question 8

The required rate of return to justify an investment in a capital project is the __________.

A) Interest rate
B) Financing rate
C) Coupon rate
D) Discount rate
E) None of the above

Question 9

The initial cost of a capital project is the actual cost of starting the project adjusted for which of the following?

A) Any installation, delivery or packaging costs
B) Discounts to the initial price
C) The sale of existing equipment or machinery
D) Taxes
E) All of the above

Question 10

Typically, several different sources of debt and/or equity financing will be used to fund a capital project.

Question 11

A capital budget is not helpful in evaluating alternative capital expenditures.

Question 12

In the process of capital budgeting, the incremental cash flow of the project is determined before the initial cost of the project.

Question 13

For any project to be accepted in a capital budget, the project's payback period must be less than the maximum acceptable payback period set by the organization.

Question 14

The discounted payback period method factors time value of money concepts into the calculation.

Question 15

If a project has a positive NPV, it will generate cash above its debt service.

Question 16

The internal rate of return is a measure of a project's probability of profitability.

Question 17

IRR is incredibly useful for a project with non-normal cash flows since only one IRR can exist.

Question 18

MIRR is the discount rate where the present value of the project's costs is to equal the present value of the project's terminal value.

Question 19

Successful organizations do not place emphasis on post-audits.