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Capital budgeting techniques Multiple choice questions (MCQs)
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ABOUT THIS QUIZ:
 Chapter: Capital budgeting techniques
 Quiz Type: Multiple choice questions (MCQs)
 Number of MCQs: 20
 Total Points: 20
 Approximate Time Required: 10 – 12 minutes
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Question 1 of 20
1. Question
Which of the following capital budgeting techniques takes into account the incremental accounting income rather than cash flows:
Correct
Awesome! Your answer is correct.
Accounting rate of return takes into account the project’s impact on net operating income rather than cash flows.

Question 2 of 20
2. Question
Which of the following techniques does not take into account the time value of money?

Question 3 of 20
3. Question
The current worth of a sum of money to be received at a future date is called:

Question 4 of 20
4. Question
The difference between the present value of cash inflows and the present value of cash outflows associated with a project is known as:

Question 5 of 20
5. Question
If present value of total cash outflow is $15,000 and present value of total cash inflow is $14,000, what is the net present value of the project?

Question 6 of 20
6. Question
If present value of cash outflow is equal to present value of cash inflow, the net present value will be:

Question 7 of 20
7. Question
Generally, a project is considered acceptable if its net present value is:

Question 8 of 20
8. Question
A company is considering the following three investment proposals:
A). Investment required: $80,000, present value of future cash inflows: $96,000
B). Investment required: $75,000, present value of future cash inflows: $120,000
C). Investment required: $100,000, present value of future cash inflows: $150,000
How would you rank the above investment proposals using profitability index method?
Correct
Awesome! Your answer is correct.
Computation:
 A: $96,000/$80,000 = 1.2
 B: $120,000/$75,000 = 1.6
 C: $150,000/$100,000 = 1.5
The project with the highest profitability index is the most desirable project. Therefore, the ranking of three projects using profitability index is B, C, A.
Incorrect
Your answer is incorrect. The correct answer is “B, C, A” (option 4).
Computation:
 A: $96,000/$80,000 = 1.2
 B: $120,000/$75,000 = 1.6
 C: $150,000/$100,000 = 1.5
The project with the highest profitability index is the most desirable project. Therefore, the ranking of three projects using profitability index is B, C, A.

Question 9 of 20
9. Question
Consider the following data on a proposed investment:
 Investment required: $160,000
 Annual cash inflows: $40,000
 Life of the investment: 6 years
 Salvage value: 0
 Discount rate: 10%
Based on the above data, what is the payback period of the proposed investment project?

Question 10 of 20
10. Question
An increase in the discount rate will:

Question 11 of 20
11. Question
Using profitability index, the preference rule for ranking projects is:

Question 12 of 20
12. Question
The net present value of four projects is given below:
 Project A: $25,000
 Project B: $10,000
 Project C: $22,000
 Project D: $15,000
The four projects given above require the same amount of investment. How would you rank them using net present value (NPV) method?

Question 13 of 20
13. Question
If the profitability index of a project is 0.75, it means:

Question 14 of 20
14. Question
The comparison of actual costs and benefits of a project with original estimates is formally known as:

Question 15 of 20
15. Question
A project whose acceptance prevents the acceptance of another project is known as:

Question 16 of 20
16. Question
A project whose acceptance requires the acceptance of another project is known as:

Question 17 of 20
17. Question
The XYZ purchases a new equipment. The selected data is given below:
 Cost of equipment: $25,000
 Useful life of equipment: 5 years
 Tax rate: 30%
If equipment is depreciated using straight line method, what is the depreciation tax shield associated with the new equipment?

Question 18 of 20
18. Question
If interest expense of a company is $300,000 and tax rate is 40%, the aftertax cost of interest is:

Question 19 of 20
19. Question
If two alternative investments are compared using incremental cost approach, the difference between the net present values of two alternatives will be:

Question 20 of 20
20. Question
The Washington Company has gathered the following data on a proposed investment:
 Initial investment required: $800,000
 Annual incremental revenue: $180,000
 Annual incremental expenses: $60,000
 Discount rate: 12%
 Salvage value: $0
Based on the above information, the accounting/simple rate of return is:
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