Capital budgeting techniques

Multiple choice questions (MCQs) quiz

1. Which of the following capital budgeting techniques takes into account the incremental accounting income rather than cash flows:

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

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

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

5. 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?

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

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

8. 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 the profitability index method?

9. 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?

10. An increase in the discount rate will:

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

12. 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?

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

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

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

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

17. 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?

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

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

20. 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: