FINANCE 301 Exam | 40 Questions all with 100%
Correct Answers
Capital Budgeting, Capital refers to - ANSWER capital refers to long term financing used
to acquire fixed assets or fund any long term project
Capital Budgeting, Budgeting refers to - ANSWER Implies an expenditure plan
Capital Budgeting - ANSWER is the decision area of financial management that
establishes criteria for investing resources in long term projects
"Project" (in capital budgeting) - ANSWER a generic term for long term expenditures
What are the different types of projects? - ANSWER Replacement of old or obsolete
equipment
expansion of current operations
expansion into new products or markets
non revenue or mandatory projects
independent vs. mutually exclusive projects
Payback - ANSWER How long will it take to recoup our initial investment? Pluses: easy to
compute, gives insight to liquidity
Minuses: Ignores TVM, ignores cash flows beyond the payback period, biased against
long term projects
Decision rule: if payback is <= maximum allowable period, accept
Discounted Payback - ANSWER How long will it take to recoup our initial investment in
todays dollars?
, Plus: adjusts to changing required returns (discount rate)
Minus: still ignores cash flows beyond the discounted payback period
Decision Rule: if payback is <= maximum allowable period, accept
Net Present value - ANSWER Does the investment create or destroy value?
NPV= PV of inflows-PV of outflows
if NPV is positive, project creates wealth
decision rule: if inflows >= outflows, accept (if NPV >=0, accept)
if NPV is positive, project creates wealth
Profitability Index - ANSWER Relative size of the PV of a projects inflows to the PV of its
outflows (aka bang for the buck)
Useful when explaining results to people who don't understand TVM
PV of inflows/PV of outflows
decision rule: if PI >= 1.00, accept
Internal Rate of Return - ANSWER The precise interest rate that equates the PV of the
inflows w/ the PV of the outflows (gives us NPV of 0)
Cost of capital is generally also the required rate of return
the sign of NPV is important relative to IRR
decision rule: if IRR>cost of capital (that financed the project), accept
if NPV is positive, the IRR will be > than discounted rate
if NPV is negative, IRR will be < discount rate
Conflicts in Ranking capital budgeting tools - ANSWER Each capital budgeting tool will
lead to a accept/reject decision
Correct Answers
Capital Budgeting, Capital refers to - ANSWER capital refers to long term financing used
to acquire fixed assets or fund any long term project
Capital Budgeting, Budgeting refers to - ANSWER Implies an expenditure plan
Capital Budgeting - ANSWER is the decision area of financial management that
establishes criteria for investing resources in long term projects
"Project" (in capital budgeting) - ANSWER a generic term for long term expenditures
What are the different types of projects? - ANSWER Replacement of old or obsolete
equipment
expansion of current operations
expansion into new products or markets
non revenue or mandatory projects
independent vs. mutually exclusive projects
Payback - ANSWER How long will it take to recoup our initial investment? Pluses: easy to
compute, gives insight to liquidity
Minuses: Ignores TVM, ignores cash flows beyond the payback period, biased against
long term projects
Decision rule: if payback is <= maximum allowable period, accept
Discounted Payback - ANSWER How long will it take to recoup our initial investment in
todays dollars?
, Plus: adjusts to changing required returns (discount rate)
Minus: still ignores cash flows beyond the discounted payback period
Decision Rule: if payback is <= maximum allowable period, accept
Net Present value - ANSWER Does the investment create or destroy value?
NPV= PV of inflows-PV of outflows
if NPV is positive, project creates wealth
decision rule: if inflows >= outflows, accept (if NPV >=0, accept)
if NPV is positive, project creates wealth
Profitability Index - ANSWER Relative size of the PV of a projects inflows to the PV of its
outflows (aka bang for the buck)
Useful when explaining results to people who don't understand TVM
PV of inflows/PV of outflows
decision rule: if PI >= 1.00, accept
Internal Rate of Return - ANSWER The precise interest rate that equates the PV of the
inflows w/ the PV of the outflows (gives us NPV of 0)
Cost of capital is generally also the required rate of return
the sign of NPV is important relative to IRR
decision rule: if IRR>cost of capital (that financed the project), accept
if NPV is positive, the IRR will be > than discounted rate
if NPV is negative, IRR will be < discount rate
Conflicts in Ranking capital budgeting tools - ANSWER Each capital budgeting tool will
lead to a accept/reject decision
