Question 1

Which of the following statements is true regarding operating and capital budgets?
A) Capital budget items are infrequent purchases.
B) Capital outlays are far larger than operating outlays.
C) Capital budget items produce a stream of benefits over a multi-year horizon.
D) All of these are correct.

Accepted Answer

Capital budget items are typically infrequent and involve large expenditures that provide benefits over multiple years, making all the statements correct.

Question 2

Which of the following types of capital expenditures requires the most scrutiny?
A) Mandatory investments
B) Discretionary investments replacing existing assets
C) Discretionary investments expanding the size of current operations
D) Discretionary investments that push the organization into new products or markets

Accepted Answer

Discretionary investments that push the organization into new products or markets require the most scrutiny because they involve higher risk and uncertainty, as they venture into untested areas for the organization.

Question 3

Which of the following is the formula to calculate the discounted value of a single payment received in the future? A) FV ÷ (1 + i)ⁿ B) PV *(1 + i)ⁿ C) FV * (1 - (1 ÷ (1 + i)ⁿ) ÷ i D) PV* ((1 + i)ⁿ- 1) ÷ i

Accepted Answer

A

Question 4

Which of the following is the formula to calculate the compounded value of a single payment invested today to be withdrawn in the future? A) FV ÷ (1 + i)ⁿ B) PV*(1 + i)ⁿ C) FV* (1 - (1 ÷ (1 + i)ⁿ) ÷ i D) PV* ((1 + i)ⁿ-1) ÷ i

Accepted Answer

The formula to calculate the compounded value of a single payment (future value) is FV = PV * (1 + i)^n, where PV is the present value, i is the interest rate, and n is the number of periods.

Question 5

The decision rule for internal rate of return (IRR) when unlimited funds are available is:
A) pursue any investment with an IRR < 0.
B) pursue any investment with a IRR ≥ 0.0.
C) pursue any investment with a IRR ≥ discount rate.

Accepted Answer

The IRR decision rule states that a project should be pursued if its IRR is greater than or equal to the discount rate, as it indicates the project is expected to generate a return greater than the cost of capital.

Question 6

The goal of capital budgeting is to:
A) ensure total revenues exceed expenses.
B) determine whether an investment producing a stream of revenues over multiple years will recoup its initial investment.
C) determine whether an organization's assets exceed its liabilities.
D) predict future output.

Accepted Answer

The goal of capital budgeting is to determine whether an investment producing a stream of revenues over multiple years will recoup its initial investment.

Question 7

Given a $10,000,000 capital budget, a discount rate of 10%, and seven projects totaling $14,000,000, which capital rationing rule should be used?
A) Invest in the lowest cost projects until all investment funds are exhausted
B) Invest in all projects with an IRR > 0
C) Invest in all projects with an IRR > 10%
D) Invest in the projects with the highest IRR until all investment funds are exhausted
E) Invest in the projects with the highest IRR that are greater than or equal to 10% until all investment funds are exhausted

Accepted Answer

The capital rationing rule should prioritize projects with an IRR greater than or equal to the discount rate (10%) and then select those with the highest IRR until the budget is exhausted.

Question 8

The role of sensitivity analysis is to:
A) determine the amount of variation in key variables (e.g., output, revenues, or expenses).
B) determine how much key variables can change before an investment will fail to meet financial targets.
C) forecast future discount rates.
D) recommend the projects to be pursued and rejected.

Accepted Answer

Sensitivity analysis is used to determine how much key variables can change before an investment will fail to meet financial targets, helping assess the risk and robustness of a project.

Question 9

The goal of post-expenditure review in the capital budgeting process is to:
A) identify managers that produce accurate and inaccurate output, revenue, and expense forecasts for investments.
B) discover how and why forecasts differed from actual operating results.
C) hold managers accountable for poor forecasts.
D) All of these are correct.

Accepted Answer

The post-expenditure review aims to evaluate the accuracy of forecasts, understand discrepancies between forecasts and actual results, and hold managers accountable, encompassing all the options provided.

Question 10

An increase in the discount rate will reduce the present value of future cash flows.

Accepted Answer

An increase in the discount rate decreases the present value of future cash flows because future cash flows are discounted more heavily, reducing their present value.

Question 11

An increase in the discount rate will increase the future value of current investments.

Accepted Answer

The answer of An increase in the discount rate will...

Question 12

An increase in the number of years before future cash flows are received will increase their present value.

Accepted Answer

The present value of future cash flows decreases as the number of years before they are received increases, due to the time value of money.

Question 13

An increase in the number of year an amount of money is invested will increase the future value of the investment.

Accepted Answer

The future value of an investment increases with time due to the effects of compound interest, assuming a positive interest rate.

Question 14

Sensitivity analysis is used to determine how much a variable, such as output, can change before a project will fail to meet financial goals (e.g., produce an insufficient return on investment).

Accepted Answer

Sensitivity analysis evaluates how different values of an independent variable affect a particular dependent variable under a given set of assumptions, helping to identify the impact on financial goals.

Quiz 6: Replacing and Adding Assets - Capital Budgeting

Which of the following statements is true regarding operating and capital budgets?

Which of the following types of capital expenditures requires the most scrutiny?

Which of the following is the formula to calculate the discounted value of a single payment received in the future?

Which of the following is the formula to calculate the compounded value of a single payment invested today to be withdrawn in the future?

The decision rule for internal rate of return (IRR) when unlimited funds are available is:

The goal of capital budgeting is to:

Given a $10,000,000 capital budget, a discount rate of 10%, and seven projects totaling $14,000,000, which capital rationing rule should be used?

The role of sensitivity analysis is to:

The goal of post-expenditure review in the capital budgeting process is to:

An increase in the discount rate will reduce the present value of future cash flows.

An increase in the discount rate will increase the future value of current investments.

An increase in the number of years before future cash flows are received will increase their present value.

An increase in the number of year an amount of money is invested will increase the future value of the investment.

Sensitivity analysis is used to determine how much a variable, such as output, can change before a project will fail to meet financial goals (e.g., produce an insufficient return on investment).