MCQ On Basics Of Capital Budgeting Evaluating Cash Flows

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  • 1/5 Questions

    Project whose cash flows are more than capital invested for rate of return then net present value

    • Positive
    • Independent
    • Negative
    • Zero
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About This Quiz

This quiz assesses understanding of capital budgeting and evaluating cash flows. It covers topics such as Net Present Value (NPV), Economic Value Added (EVA), payback period, and their interrelationships, crucial for investment decision-making and financial analysis.

MCQ On Basics Of Capital Budgeting Evaluating Cash Flows - Quiz

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  • 2. 

    In capital budgeting, positive net present value results in

    • Negative economic value added

    • Positive economic value added

    • Zero economic value added

    • Percent economic value added

    Correct Answer
    A. Positive economic value added
    Explanation
    Positive net present value (NPV) in capital budgeting indicates that the present value of cash inflows from an investment exceeds the present value of cash outflows. This means that the investment is expected to generate more cash inflows than the initial investment cost, resulting in positive economic value added. Economic value added measures the profitability of an investment by comparing the return on investment to the cost of capital. Therefore, a positive NPV implies that the investment is expected to create value and generate a positive economic value added.

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  • 3. 

    In mutually exclusive projects, project which is selected in comparison to other must have

    • Higher net present value

    • Lower net present value

    • Zero net present value

    • All of above

    Correct Answer
    A. Higher net present value
    Explanation
    In mutually exclusive projects, the project that is selected in comparison to others must have a higher net present value. This is because the net present value represents the difference between the present value of cash inflows and the present value of cash outflows over the life of the project. A higher net present value indicates that the project is expected to generate more positive cash flows and provide a greater return on investment compared to the other projects. Therefore, selecting the project with the highest net present value would be the most favorable choice.

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  • 4. 

    Uncovered cost at start of year is $200, full cashflow during recovery year is $400 and prior years to full recovery is 3 then payback is

    • 5 years

    • 3.5 years

    • 4 years

    • 4.5 years

    Correct Answer
    A. 3.5 years
    Explanation
    The payback period is calculated by dividing the uncovered cost at the start of the year by the full cashflow during the recovery year. In this case, the uncovered cost is $200 and the full cashflow is $400. Therefore, the payback period is 200/400 = 0.5 years. Since there are also prior years to full recovery, the payback period is extended by 3 years. Therefore, the total payback period is 0.5 + 3 = 3.5 years.

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  • 5. 

    Relationship between Economic Value Added (EVA) and Net Present Value (NPV) is considered as

    • Valued relationship

    • Economic relationship

    • Direct relationship

    • Inverse relationship

    Correct Answer
    A. Direct relationship
    Explanation
    Economic Value Added (EVA) and Net Present Value (NPV) have a direct relationship. This means that as EVA increases, NPV also increases, and vice versa. EVA measures the value created by a company, while NPV measures the present value of an investment's expected cash flows. When EVA is positive, it indicates that a company is generating value above its cost of capital, which in turn increases the NPV of investments. Conversely, when EVA is negative, it suggests that a company is not creating value, leading to a decrease in NPV. Therefore, the two concepts are directly linked.

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  • Current Version
  • Mar 20, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Apr 12, 2016
    Quiz Created by
    Mehtajimmit
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