Knowledge On Preliminary Concepts In Capital Budgeting
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
Correct Answer
B. Determination of long term investment projectExplanation
Capital budgeting is a process, through which firms decide on their long term investments.Rate this question:
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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
Correct Answer
C. Project CExplanation
Project C has the highest NPV. So, this is chosen.Rate this question:
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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
Correct Answer
B. Project BExplanation
Project B has the highest Profitability Index. So, it is chosen.Rate this question:
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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
Correct Answer
A. Project AExplanation
Project A is chosen, as it has the lowest Payback Period.Rate this question:
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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
Correct Answer
B. $1464.10Explanation
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% = $1464.10Rate this question:
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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
Correct Answer
A. $683.01Explanation
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 = $683.01Rate this question:
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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
Correct Answer
C. Not necessarily always TrueExplanation
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.Rate this question:
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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
Correct Answer
C. Both of aboveExplanation
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.Rate this question:
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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
Correct Answer
A. Greater than the amount to which money grows for an investment that compounds annuallyExplanation
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.Rate this question:
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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
Correct Answer
B. NPV, PI, and PBP select different projects as the best optionExplanation
Conflict means different capital budgeting approaches select different projects as the best option.Rate this question:
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Mar 20, 2023Quiz Edited by
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May 13, 2012Quiz Created by
Drtimam
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