Question

1. The length of time required to recover the original cost of an investment is known as the investment's _____.

a. recovery allotment period

b. time-to-reimbursement

c. payback period

d. net present value

  

2.

Which of the following capital budgeting techniques has experienced the greatest increase in usage by firms since the 1970s?

a. Traditional payback period

b. Internal rate of return

c. Net present value

d. Modified internal rate of return

3. Which of the following methods gives a direct measure of the dollar benefit on a present value basis to the firm's shareholders?

a. Modified internal rate of return (MIRR) method

b. Discounted payback period method

c. Internal rate of return (IRR) method

d. Net present value (NPV) method

4. Which of the following is required to compute the internal rate of return (IRR) of a project?

a. The required rate of return for the project

b. The terminal value of the cash flows of the project

c. The net present value (NPV) of the project

d. The cash inflows and cash outflows for the project

5. A capital budgeting project should be accepted if its NPV is:

a. positive after discounting all the cash inflows and outflows for the project.

b. a negative value that indicates a high expected rate of return.

c. equal to capital investment in the project.

d. greater than the total cash inflows from the project.

Answer 1

ANSWER 1)

CORRECT OPTION : Option (c) : Payback Period

EXPLANATION : Payback Period is the tenure within which our Initial Investment gets completely recovered from the future cash inflows from the project

ANSWER 2)

CORRECT OPTION : Option (c) : Net Present Value

EXPLANATION : Net Present Value method is a very common and widely used technique of Capital Budgeting since it provides an accurate estimate of the Benefits from a Prospective Project considering time value of money at the same time.

ANSWER 3)

CORRECT OPTION : Option (d) : Net Present Value (NPV) Method

EXPLANATION : NPV Method tells us that what benefit we are getting from a project in dollar terms over and above what we initially invested and that too in present value terms as all the future cash inflows are discounted values.

ANSWER 4)

CORRECT OPTION : Option (d) : The Cash Inflows and Cash Outflows for the project

EXPLANATION : Internal Rate of Return is basically that rate at which our Inflows gets equal to our cash outflows. So in order to compute IRR of the project, we need both Cash Inflows and the Outflows.

ANSWER 5)

CORRECT OPTION : Option (a) :  positive after discounting all the cash inflows and outflows for the project

EXPLANATION : NPV is the difference between the "Present Value of Inflows" and the "Initial Investment" of the project. So if our NPV is Positive, we should invest in such project.