# Knowledge On Preliminary Concepts In Capital Budgeting

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This quiz has 10 multiple choice questions. The goal of this quiz is to test knowledge on Preliminary Concepts in Capital Budgeting

• 1.

### Capital Budgeting is -

• A.

A sort of budget

• B.

Determination of long term investment project

• C.

Raising capital for a firm

B. Determination of long term investment project
Explanation
Capital budgeting is a process, through which firms decide on their long term investments.

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• 2.

### You are given three Projects – A, B & C. For Project A, Net Present Value (NPV) is \$20,000; For Project B, NPV is \$30,000; For Project C, NPV is \$40,000. Which project shall you choose?

• A.

Project A

• B.

Project B

• C.

Project C

C. Project C
Explanation
Project C has the highest NPV. So, this is chosen.

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• 3.

### You are given three Projects – A, B & C. Suppose Project A has Profitability Index (PI) of 2.14, Project B has PI of 3.25 and Project C has PI of 3.19. Which project shall you choose?

• A.

Project A

• B.

Project B

• C.

Project C

B. Project B
Explanation
Project B has the highest Profitability Index. So, it is chosen.

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• 4.

### You are given three Projects – A, B & C.Suppose Project A has Pay Back Period (PBP) of 2 years, Project B has PBP of 3.5 years and Project C has PBP of 3 years. Which project shall you choose?

• A.

Project A

• B.

Project B

• C.

Project C

A. Project A
Explanation
Project A is chosen, as it has the lowest Payback Period.

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• 5.

### Suppose interest rate is 10% compounded annually and you are investing \$1000 now. What amount of money your investment will grow in 4 years time?

• A.

\$1331.00

• B.

\$1464.10

• C.

\$1400.00

B. \$1464.10
Explanation
After Year 1, \$1000 becomes (at 10% interest): 1000 + 1000 x 10% = \$1100
After Year 2: 1100 + 1100 x 10% = \$1210
After Year 3: 1210 + 1210 x 10% = \$1331
After Year 4: 1331 + 1331 x 10% = \$1464.10

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• 6.

### Suppose interest rate is 10%. 4 years from now, you expect to receive \$1000. What is it's discounted value to you at present?

• A.

\$683.01

• B.

\$826.45

• C.

\$1000

A. \$683.01
Explanation
Future Cash Flows are discounted by the interest rate using the formula: FV/(1+r)^n. Here, FV=\$1000, r=10%, n=4. So, Present Value = 1000/1.1^4 = \$683.01

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• 7.

### If a Project A has greater NPV than that for a Project B, then Project A has greater PBP than that for Project B. This statement is -

• A.

Always True

• B.

Always False

• C.

Not necessarily always True

C. Not necessarily always True
Explanation
NPV and PBP are two different capital budgeting methods, with different concepts. So, not necessarily NPV and PBP will always choose the same project as the best project.

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• 8.

### Money has a time value, means -

• A.

There is an interest rate, that discounts the value of future cash flows

• B.

Cash flow now is not equivalent to same amount of cash flow in future

• C.

Both of above

C. Both of above
Explanation
Increased interest rate causes decrease in the value of future money in present time. For this same reason, cash now is not equivalent to cash in later periods. Thus, money has time value.

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• 9.

### If compounding occurs quarterly, then the amount to which money grows for an investment is -

• A.

Greater than the amount to which money grows for an investment that compounds annually

• B.

Less than the amount to which money grows for an investment that compounds annually

• C.

Equal to the amount to which money grows for an investment that compounds annually

A. Greater than the amount to which money grows for an investment that compounds annually
Explanation
Quarterly compounding means there are 4 compounding per year. The frequent the compounding occurs, the faster the money grows. So, quarterly compounding results in higher rise than annual compounding.

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• 10.

### In the evaluation of projects, conflict occurs when -

• A.

NPV, PI, and PBP all select the same project as the best option

• B.

NPV, PI, and PBP select different projects as the best option

• C.

None of the above

B. NPV, PI, and PBP select different projects as the best option
Explanation
Conflict means different capital budgeting approaches select different projects as the best option.

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• Current Version
• Mar 20, 2023
Quiz Edited by
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• May 13, 2012
Quiz Created by
Drtimam

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