D076 Module 11 Question and answers
100% correct 2025/2026
Why is it important to consider all relevant cash flows in an ideal evaluation method for capital
investment? - correct answer ✔Without considering every cash flow of a potential project, you do not
know how the project will enhance the value of a firm.
Talia is comparing four mutually exclusive projects. In order to choose the best project to optimize the
goal of the firm, which capital budgeting method should Talia use? - correct answer ✔Net present
value (NPV)
Alphabet Co. has $50,000 to spend on capital investment projects for the next year. It will do as many
projects as it has cash for. Alphabet Co. calculates the potential incremental cash flows and costs of the
projects as well as the NPV, IRR, and PI for each project. How should the company decide which projects
to invest in if it wants to maximize the total amount of value created? - correct answer ✔It should
choose the projects with the highest PIs until all capital has been used.
What is opportunity cost as it relates to the time value of money? - correct answer ✔It is the
opportunity you forgo to invest in other options due to the time scope of an investment.
Why is the timing of cash flows an important characteristic of capital investment? - correct answer
✔Timing of cash flows is related to the opportunity cost associated with those cash flows.
Why is there always a cost for bringing funds into a business? - correct answer ✔A business must
compensate investors for the risk that they are taking to invest in the business.
What is the relationship between the risk and the rate of return? - correct answer ✔The higher the risk
investors have to take on, the higher return they require.
, How can having more debt benefit a company? - correct answer ✔Interest expense on debts is paid
before taxes are calculated.
Which example demonstrates a financing decision in a firm? - correct answer ✔How a company will
fund its assets and operations—namely, what proportions of debt and equity the business will use
incidental cash flows - correct answer ✔a type of incremental cash flow that are indirectly created by a
project but are not explicit revenues or costs.
What are incremental cash flows? - correct answer ✔Any additional cash flows, whether in or out of
the firm, that are created as a result of accepting a project
How does allocated overhead affect the selection of capital investment projects? - correct answer
✔These cash flows are not a direct result of a specific project but are a general cost to the firm.
How are non-incremental cash flows different from incidental cash flows? - correct answer ✔Incidental
cash flows are indirect cash flows that are not explicitly revenues or costs. Nevertheless, they must be
included in the analysis.
How does cannibalization factor into capital investment decisions? - correct answer ✔If your company
is planning on launching a product, and that product is going to steal some of the sales of another of the
company's products, that loss of sales could be an incidental cost or revenue caused by the new
product.
A company is considering five projects that are not mutually exclusive. However, the company does not
have enough money to do all of them. In order to prioritize projects that fit within the company's
budget, which capital budgeting method should be used? - correct answer ✔Profitability index (PI)
Which scenario is an example of an opportunity cost that is not associated with cash flows? - correct
answer ✔Albert decides to stay home and study for his test instead of going to the movies.
100% correct 2025/2026
Why is it important to consider all relevant cash flows in an ideal evaluation method for capital
investment? - correct answer ✔Without considering every cash flow of a potential project, you do not
know how the project will enhance the value of a firm.
Talia is comparing four mutually exclusive projects. In order to choose the best project to optimize the
goal of the firm, which capital budgeting method should Talia use? - correct answer ✔Net present
value (NPV)
Alphabet Co. has $50,000 to spend on capital investment projects for the next year. It will do as many
projects as it has cash for. Alphabet Co. calculates the potential incremental cash flows and costs of the
projects as well as the NPV, IRR, and PI for each project. How should the company decide which projects
to invest in if it wants to maximize the total amount of value created? - correct answer ✔It should
choose the projects with the highest PIs until all capital has been used.
What is opportunity cost as it relates to the time value of money? - correct answer ✔It is the
opportunity you forgo to invest in other options due to the time scope of an investment.
Why is the timing of cash flows an important characteristic of capital investment? - correct answer
✔Timing of cash flows is related to the opportunity cost associated with those cash flows.
Why is there always a cost for bringing funds into a business? - correct answer ✔A business must
compensate investors for the risk that they are taking to invest in the business.
What is the relationship between the risk and the rate of return? - correct answer ✔The higher the risk
investors have to take on, the higher return they require.
, How can having more debt benefit a company? - correct answer ✔Interest expense on debts is paid
before taxes are calculated.
Which example demonstrates a financing decision in a firm? - correct answer ✔How a company will
fund its assets and operations—namely, what proportions of debt and equity the business will use
incidental cash flows - correct answer ✔a type of incremental cash flow that are indirectly created by a
project but are not explicit revenues or costs.
What are incremental cash flows? - correct answer ✔Any additional cash flows, whether in or out of
the firm, that are created as a result of accepting a project
How does allocated overhead affect the selection of capital investment projects? - correct answer
✔These cash flows are not a direct result of a specific project but are a general cost to the firm.
How are non-incremental cash flows different from incidental cash flows? - correct answer ✔Incidental
cash flows are indirect cash flows that are not explicitly revenues or costs. Nevertheless, they must be
included in the analysis.
How does cannibalization factor into capital investment decisions? - correct answer ✔If your company
is planning on launching a product, and that product is going to steal some of the sales of another of the
company's products, that loss of sales could be an incidental cost or revenue caused by the new
product.
A company is considering five projects that are not mutually exclusive. However, the company does not
have enough money to do all of them. In order to prioritize projects that fit within the company's
budget, which capital budgeting method should be used? - correct answer ✔Profitability index (PI)
Which scenario is an example of an opportunity cost that is not associated with cash flows? - correct
answer ✔Albert decides to stay home and study for his test instead of going to the movies.
