Q. In capital budgeting, what does NPV stand for?
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A.
Net Profit Value
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B.
Net Present Value
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C.
Net Payment Value
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D.
Net Profit Variance
Solution
NPV stands for Net Present Value, which is the difference between the present value of cash inflows and outflows.
Correct Answer:
B
— Net Present Value
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Q. What does the Payback Period measure?
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A.
The time it takes to recover the initial investment
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B.
The profitability of a project over its lifetime
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C.
The total cash inflows from a project
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D.
The risk associated with a project
Solution
The Payback Period measures the time required to recover the initial investment from cash inflows.
Correct Answer:
A
— The time it takes to recover the initial investment
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Q. What is the Internal Rate of Return (IRR)?
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A.
The discount rate that makes NPV zero
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B.
The rate of return on equity
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C.
The average return on investment
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D.
The cost of capital
Solution
The Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) of a project equal to zero.
Correct Answer:
A
— The discount rate that makes NPV zero
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Q. What is the main advantage of using NPV over other capital budgeting techniques?
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A.
It is easier to calculate
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B.
It provides a clear dollar value of profitability
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C.
It does not require cash flow estimates
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D.
It is the only method that considers risk
Solution
The main advantage of NPV is that it provides a clear dollar value of the profitability of a project.
Correct Answer:
B
— It provides a clear dollar value of profitability
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Q. What is the primary purpose of capital budgeting?
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A.
To determine the profitability of a project
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B.
To assess the liquidity of a company
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C.
To evaluate the efficiency of operations
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D.
To manage day-to-day expenses
Solution
Capital budgeting is primarily used to evaluate the profitability and feasibility of long-term investments or projects.
Correct Answer:
A
— To determine the profitability of a project
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Q. Which accounting standard is primarily concerned with the recognition of revenue from long-term projects?
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A.
IFRS 15
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B.
IAS 16
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C.
IFRS 9
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D.
IAS 2
Solution
IFRS 15 is the accounting standard that deals with the recognition of revenue from contracts with customers, including long-term projects.
Correct Answer:
A
— IFRS 15
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Q. Which capital budgeting technique considers the time value of money?
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A.
Payback Period
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B.
Accounting Rate of Return
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C.
Net Present Value
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D.
Simple Payback
Solution
Net Present Value (NPV) takes into account the time value of money by discounting future cash flows.
Correct Answer:
C
— Net Present Value
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Q. Which method is best for comparing projects of different sizes?
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A.
Payback Period
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B.
Net Present Value
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C.
Internal Rate of Return
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D.
Profitability Index
Solution
The Profitability Index is best for comparing projects of different sizes as it shows the value created per unit of investment.
Correct Answer:
D
— Profitability Index
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Q. Which of the following is a limitation of the Payback Period method?
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A.
It ignores cash flows after the payback period
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B.
It is difficult to calculate
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C.
It considers the time value of money
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D.
It requires detailed cash flow projections
Solution
A limitation of the Payback Period method is that it ignores cash flows that occur after the payback period.
Correct Answer:
A
— It ignores cash flows after the payback period
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Q. Which of the following is NOT a capital budgeting technique?
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A.
Net Present Value (NPV)
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B.
Internal Rate of Return (IRR)
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C.
Payback Period
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D.
Current Ratio
Solution
The Current Ratio is a liquidity measure, not a capital budgeting technique.
Correct Answer:
D
— Current Ratio
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