Free Practice Quiz Question List

6 Capital Budgeting Online Quiz Questions

Use this free practice quiz with 20 questions to review 6 Capital Budgeting, test your knowledge, and prepare for your next test or exam.

20 questions

True or false

1 point

True or false: Ordinary payback does not account for the time value of money or cash flows received after the initial investment has been recovered.

A
True
B
False

Written response

1 point

What measure discounts project cash flows before calculating how long it takes to recover the initial investment?

Fill in the blank

1 point

A company has already paid for a feasibility study, and that payment cannot be recovered. In evaluating whether to proceed, the study payment is a .

Choose one

1 point

A project has several future cash flows. Which statement defines its internal rate of return?

A
The rate at which the project's payback period equals its useful life
B
The discount rate that makes the project's NPV equal to zero
C
The project's annual cash inflow divided by its initial investment
D
The discount rate that makes the project's cash inflows equal to its initial outlay without regard to timing

Written response

1 point

A project costs $\$72{,}000$ and generates equal cash inflows of $\$24{,}000$ at the end of each year. What is its ordinary payback period? Enter your answer in years.

Choose one

1 point

An independent project has a positive NPV when discounted at a rate appropriate to its risk. What is the usual decision?

A
Reject it because any investment with future cash inflows has uncertain returns
B
Accept it only if its payback period is shorter than one year
C
Accept it because a positive NPV means it is expected to add value after covering its required return
D
Defer the decision until its IRR is greater than the highest possible return

Fill in the blank

1 point

A project will use a company-owned building that could otherwise be rented out. The value of the foregone rental income is an .

Choose all

1 point

A team is building a project's cash-flow forecast. Which practices are consistent with sound capital budgeting? Select all that apply.

A
Include changes in existing sales or costs caused by taking the project
B
Use accounting profit instead of cash flows because it includes all project effects
C
Estimate after-tax cash flows
D
Pair nominal cash flows with a nominal discount rate

True or false

1 point

True or false: If NPV and IRR rank mutually exclusive projects differently, IRR should always be preferred because it is expressed as a percentage.

A
True
B
False

Choose one

1 point

A project's cash flows alternate between inflows and outflows more than once. What is a potential problem when evaluating it with IRR?

A
IRR cannot be calculated for any project with an initial outflow
B
Cash flows that change direction more than once can produce multiple or no meaningful IRRs
C
IRR always ranks mutually exclusive projects in the same order as NPV
D
IRR measures value created in currency rather than a percentage return

Choose one

1 point

A firm must choose one of two mutually exclusive projects. Both have positive NPVs, and their estimates are compared on a consistent basis. Project A has an NPV of $\$80{,}000$ and an IRR of $18\%$ ; Project B has an NPV of $\$110{,}000$ and an IRR of $15\%$ . Which choice is generally best for value creation?

A
Choose Project B because, on a consistent comparison basis, it has the higher positive NPV
B
Choose Project A because any higher IRR guarantees more value creation
C
Choose Project A because the shorter payback period always determines the best alternative
D
Choose neither because mutually exclusive projects cannot both have positive NPV

Open ended

1 point

An independent project has a positive NPV but a longer ordinary payback period than a competing investment that is not mutually exclusive. Explain why the project may still be worth accepting and identify two limitations of using ordinary payback as the main decision rule.

Choose all

1 point

A firm is assessing a project whose risk differs from its current operations. Which steps would improve its treatment of uncertainty and risk? Select all that apply.

A
Test how the result changes under different sales or cost assumptions
B
Use the firm's existing discount rate automatically, even when project risk is materially different
C
Use scenario analysis to examine how combinations of assumptions affect the outcome
D
Reflect the project's risk when selecting its discount rate

Choose one

1 point

A company has limited capital and several projects with different investment sizes. Why might it need to evaluate portfolios of projects rather than simply select the project with the highest IRR?

A
Select the project with the highest IRR, regardless of the capital limit
B
Evaluate feasible combinations of projects to identify the best portfolio within the capital limit
C
Reject all projects unless each has the same initial investment
D
Rank projects only by ordinary payback, since it measures total value created

Choose one

1 point

A company is evaluating a project that would use warehouse space it already owns. The space could instead be rented to another business. Which treatment is appropriate in the project analysis?

A
Include the equipment's purchase price because the company has already paid it.
B
Include the value of the warehouse space if it could otherwise be rented out.
C
Exclude all costs associated with resources the company already owns.
D
Include only accounting expenses that appear on the income statement.

True or false

1 point

Ordinary payback can favor a project that recovers its initial investment quickly even if it has poor cash flows after the payback cutoff.

A
True
B
False

Choose one

1 point

An independent project has a positive NPV when discounted at a rate appropriate for its risk. Which decision is generally supported by this result?

A
Accept it because its expected benefits exceed its costs after accounting for the required return.
B
Reject it because the required return has not been recovered.
C
Accept it only if its payback period is shorter than that of every alternative.
D
Reject it unless its IRR is higher than the IRR of every other project.

Choose one

1 point

A project forecast expresses future cash flows in nominal terms, including expected inflation. Which discount-rate choice keeps the analysis consistent?

A
Discount real cash flows using a nominal discount rate.
B
Discount nominal cash flows using a real discount rate.
C
Pair nominal cash flows with a nominal discount rate.
D
Use whichever rate produces the higher NPV, regardless of the cash-flow assumptions.

Written response

1 point

A project costs $\$120{,}000$ and generates equal annual cash inflows of $\$30{,}000$ . Using ordinary payback, how many years does it take to recover the initial investment?

Written response

1 point

A project requires $\$100$ now and returns $\$110$ exactly one year later, with no other cash flows. What is its IRR? Enter the percentage number, using 10 for 10%.