Capital Budgeting – Advance Question
- Which of the following statements is correct?
(a) If PI < 1, its NPV is less than zero.
(b) If PI = 0, its NPV is greater than zero
(c) If PI > 1, its NPV will be negative
(d) PI of a project is always greater than one - Profitability index method is an extension of:
(a) Net Present value
(b) Internet Rate of Return
(c) Payback Period
(d) Accounting Rate of Return - Which of the following variables is not known in Internal Rate of Return?
(a) Initial Cash flows
(b) Discount Rate
(c) Terminal Inflows
(d) Life of the project - In case of Mutually Exclusive Proposals:
(a) Only the best project is selected.
(b) All Projects with positive NPV are selected
(c) Even Negative NPV Project may be selected
(d) At least two proposals are selected - Reinvestment Rate Assumption in implied in:
(a) Net Present Value
(b) Internal Rate of Return
(c) Both (a) and (b)
(d) None of the above - Payback period Technique is based on:
(a) All cash Flows
(b) Only higher Cash Flows
(c) Earlier Cash Flows
(d) Selected Cash Flows - In Capital Budgeting Decisions, a single cost of capital is used because:
(a) Required Rate of Return’s is same for all projects
(b) It avoids calculation of Required Rate for different projects.
(c) Both (a) and (b)
(d) None of the above - PI of a project is the ratio of Present value of inflows to:
(a) Initial Cost
(b) PV of outflows
(c) Total Cash inflows
(d) Total Outflows - NPV of a proposal indicates:
(a) Net Incremental Profit
(b) Net addition to Wealth
(c) Total Value of the Proposal
(d) None of the above - NPV method and IRR method always give to mutually exclusive projects:
(a) Same Ranking
(b) Different Ranking
(c) Inverse Ranking
(d) None of the above - Which of the following method of evaluation of capital budgeting proposals focuses on liquidity not on profitability?
(a) Internal Rate of Return
(b) Net Present Value
(c) Accounting Rate of Return
(d) Payback Period - In case of selection of mutually exclusive projects, the rule is:
(a) Only the best one
(b) All the good ones
(c) All positive NPV projects
(d) None of the above - Which method of capital budgeting assumes, that the cash flows are reinvested at project’s rate of return?
(a) Terminal Value
(b) Net Present Value
(c) Internal Rate of Return
(d) Accounting Rate of Return - In case of risky projects, is the required rate of return would generally be:
(a) Higher,
(b) Lower,
(c) Same as for others
(d) None of the above - Which of the following methods state the return from a project in percentage form?
(a) Terminal Value method
(b) Discounted Payback Method
(c) Internal Rate of Return
(d) Net Present Value - Which of the following methods focuses on the maximization of wealth of shareholders?
(a) Accounting Rate of Return
(b) Payback Period
(c) Profitability Index,
(d) Internal Rate of Return - Which of the following assumes that cash flows from a project are uniform throughout the life of the project?
(a) Internal Rate of Return
(b) Net Present Value
(c) Profitability Index,
(d) None of the above - Project costing Rs. 8,00,000 and a life of 5 years is expected to bring cash inflows of Rs. 2,00,00 p.a. What is the payback period?
(a) 5 years
(b) 4 years
(c) 3 years
(d) None of the above - A project has a profitability index of 1.30. What does it mean?
(a) That NPV is less than zero
(b) That Payback period is more than one year.
(c) That the project returns Rs. 1.30 for every Rs.1 invested in projected
(d) That IRR is 1.30 times that of the Hurdle Rate. - Accounting Rate of Return is based on:
(a) Average expected profit
(b) Average Past Profit
(c) Average Cash Profit
(d) Life of the Project - NPV technique is based on:
(a) Discounting Procedure
(b) Compounding Procedure
(c) Averaging Procedure
(d) None of the above - Which of the following statement is correct with reference to Capital budgeting?
(a) All Capital Budgeting techniques lead to same decision.
(b) Internal Rate of Return does not consider time value of money
(c) NPV method is superior to Payback method as the former considers time value of money.
(d) Cash flow of a project are calculated before tax. - Which of the following is likely to increase the NPV of a project?
(a) Increase in cost of capital,
(b) Decrease in working capital,
(c) Spreading cash flows over a longer period
(d) Decreasing the net revenues - If IRR of a project is equal to opportunity cost of capital then:
(a) Project should be repeated
(b) NPV will be zero
(c) Project has no cash flows
(d) NPV will be positive - Number of IRR for a project is equal to:
(a) Number of Cash flows
(b) Number of Cash Outflows
(c) Life of the project
(d) Changes in the signs of Cash flows - The concept of Net Terminal Value method is based on the:
(a) Principal of Compounding
(b) Principal of discounting
(c) (a) & (b)
(d) None of the above