FNAN 522 MULTIPLE CHOICE QUESTIONS &
ANSWERS
Since the focus of capital budgeting is Cash flows, changes in non-cash accounts such
as depreciation and working capital would not be relevant in the analysis. True or False.
- Answer -False.
The most important advantage of the NPV approach is that it is the most theoretical
correct method. True or false. - Answer -True.
Relevant financial data for a project is best describe as.... - Answer -incremental cash
flows.
The change in networking capital when evaluating a capital budgeting decisions is.... -
Answer -the change in current assets minus the change in current liabilities
Some firms use the payback period as a decision criterion or as a supplement to
sophisticated decision techniques because... - Answer -it can be viewed as a measure
of risk exposure
In the context of capital budgeting, risk refers to... - Answer -the degree of variability of
the cash inflows.
One advantage of the NPV approach is that is always provides the right answer. True or
False. - Answer -True or False.
Mutually exclusive projects are projects whose cash flows are related to one another;
the acceptance of one does not eliminate the others from further consideration. True or
False. - Answer -True.
The _______ is the discount rate that equates the present value of the cash inflows with
the initial investment. - Answer -internal rate of return
On a purely theoretical basis, the NPV is the better approach to capital budgeting due to
all of the following reasons except: a) that is measures the benefits relative to the
amount invested, b) for the reasonableness of the reinvestment rate assumption, c) that
there may be multiple solutions for an IRR computation, or d) the it maximized
shareholder wealth - Answer -b) for the reasonableness of the reinvestment rate
assumption
A project has an initial investment of $600,000 and a profitability index of 1.21. The NPV
of the project is... - Answer -$725,000
ANSWERS
Since the focus of capital budgeting is Cash flows, changes in non-cash accounts such
as depreciation and working capital would not be relevant in the analysis. True or False.
- Answer -False.
The most important advantage of the NPV approach is that it is the most theoretical
correct method. True or false. - Answer -True.
Relevant financial data for a project is best describe as.... - Answer -incremental cash
flows.
The change in networking capital when evaluating a capital budgeting decisions is.... -
Answer -the change in current assets minus the change in current liabilities
Some firms use the payback period as a decision criterion or as a supplement to
sophisticated decision techniques because... - Answer -it can be viewed as a measure
of risk exposure
In the context of capital budgeting, risk refers to... - Answer -the degree of variability of
the cash inflows.
One advantage of the NPV approach is that is always provides the right answer. True or
False. - Answer -True or False.
Mutually exclusive projects are projects whose cash flows are related to one another;
the acceptance of one does not eliminate the others from further consideration. True or
False. - Answer -True.
The _______ is the discount rate that equates the present value of the cash inflows with
the initial investment. - Answer -internal rate of return
On a purely theoretical basis, the NPV is the better approach to capital budgeting due to
all of the following reasons except: a) that is measures the benefits relative to the
amount invested, b) for the reasonableness of the reinvestment rate assumption, c) that
there may be multiple solutions for an IRR computation, or d) the it maximized
shareholder wealth - Answer -b) for the reasonableness of the reinvestment rate
assumption
A project has an initial investment of $600,000 and a profitability index of 1.21. The NPV
of the project is... - Answer -$725,000
