Capital Budgeting or Capital Investment Decisions MCQs

Welcome to our comprehensive collection of Multiple Choice Questions (MCQs) on Capital Budgeting or Capital Investment Decisions, a fundamental topic in the field of IC 89 Management Accounting. Whether you're preparing for competitive exams, honing your problem-solving skills, or simply looking to enhance your abilities in this field, our Capital Budgeting or Capital Investment Decisions MCQs are designed to help you grasp the core concepts and excel in solving problems.

In this section, you'll find a wide range of Capital Budgeting or Capital Investment Decisions mcq questions that explore various aspects of Capital Budgeting or Capital Investment Decisions problems. Each MCQ is crafted to challenge your understanding of Capital Budgeting or Capital Investment Decisions principles, enabling you to refine your problem-solving techniques. Whether you're a student aiming to ace IC 89 Management Accounting tests, a job seeker preparing for interviews, or someone simply interested in sharpening their skills, our Capital Budgeting or Capital Investment Decisions MCQs are your pathway to success in mastering this essential IC 89 Management Accounting topic.

Note: Each of the following question comes with multiple answer choices. Select the most appropriate option and test your understanding of Capital Budgeting or Capital Investment Decisions. You can click on an option to test your knowledge before viewing the solution for a MCQ. Happy learning!

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Capital Budgeting or Capital Investment Decisions MCQs | Page 5 of 7

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Q41.
How are the calculation of expected cash flow and discount rates considered in modern financial risk management?

a.

Separated absolutely

b.

Never considered together

c.

Separated but interlinked

d.

Not considered at all

Discuss
Answer: (c).Separated but interlinked Explanation:In modern financial risk management, the calculation of expected cash flow and discount rates is not separated absolutely. They are considered separately but are interlinked.
Q42.
What are the two ways to compute the present value of expected inflow in any investment plan?

a.

Compute actual expected cash flow and discount at the risk-free rate

b.

Model expected cash flow relative to a risk-free set of probabilities and discount at the risk-free rate

c.

Compute actual expected cash flow and discount at the appropriate risk-adjusted discount rate

d.

Model expected cash flow relative to a risk-free set of probabilities and discount at the appropriate risk-adjusted discount rate

Discuss
Answer: (c).Compute actual expected cash flow and discount at the appropriate risk-adjusted discount rate Explanation:The two ways to compute the present value of expected inflow in any investment plan are: (a) Compute actual expected cash flow and discount at the appropriate risk-adjusted discount rate. (b) Model expected cash flow relative to a risk-free set of probabilities and then discount at the risk-free rate.
Q43.
Why do firms or investors generally stick to the first approach (compute actual expected cash flow and discount at the appropriate risk-adjusted discount rate)?

a.

It is more complex

b.

It is the least popular

c.

It conforms best with the available data

d.

It is less accurate

Discuss
Answer: (c).It conforms best with the available data Explanation:Firms or investors generally stick to the first approach because it conforms best with the available data, and the projections are capable of being verified with historical data.
Q44.
What does the Capital Asset Pricing Model (CAPM) express regarding the expected return on any bundle of assets or cash flows?

a.

E(R) = Rt + B [E (Rm) - Rf]

b.

E(R) = Rf + B [E (Rm) - Rt]

c.

E(R) = B [E (Rm) - Rf] + Rt

d.

E(R) = B [Rf - E (Rm)] + Rt

Discuss
Answer: (a).E(R) = Rt + B [E (Rm) - Rf] Explanation:According to the Capital Asset Pricing Model (CAPM), the expected return on any bundle of assets or cash flows can be expressed as E(R) = Rt + B [E (Rm) - Rf], where Rt is the risk-free rate, E (Rm) is the return on the market portfolio, and B is the covariance of returns on the assets or cash flows with the return on the market portfolio.
Q45.
What does the Internal Rate of Return (IRR) on a project represent?

a.

The break-even return for that project

b.

The total cash flows on the project

c.

The average return for the project

d.

The total net cash flows on the project

Discuss
Answer: (a).The break-even return for that project Explanation:The Internal Rate of Return (IRR) on a project represents the break-even return for that project. If the project has a return below the IRR, then the project has lost money.
Q46.
What is the primary advantage of using the IRR as a criterion for project selection and performance evaluation?

a.

It is based on account period averages

b.

It relies on accounting metrics

c.

It has the natural interpretation as the break-even return for the project

d.

It considers only the return on investment (ROI)

Discuss
Answer: (c).It has the natural interpretation as the break-even return for the project Explanation:The primary advantage of using the IRR as a criterion for project selection and performance evaluation is that it has the natural interpretation as the break-even return for the project.
Q47.
How is the Internal Rate of Return (IRR) calculated?

a.

IRR = ∑ (Cash Values at the end of the year / (1 + discount rate)^time to expiration) - Investment

b.

IRR = ∑ (Investment / (1 + discount rate)^time to expiration) - Cash Values at the end of the year

c.

IRR = ∑ (Cash Values at the end of the year * (1 + discount rate)^time to expiration) - Investment

d.

IRR = ∑ (Investment * (1 + discount rate)^time to expiration) - Cash Values at the end of the year

Discuss
Answer: (a).IRR = ∑ (Cash Values at the end of the year / (1 + discount rate)^time to expiration) - Investment Explanation:The Internal Rate of Return (IRR) is calculated as the discount rate that equates the present value of future cash flows with the initial investment, using the formula mentioned in option a.
Q48.
What is the purpose of comparing the Internal Rate of Return (IRR) to a hurdle rate?

a.

To determine the total cash flows on the project

b.

To assess the average return for the project

c.

To evaluate the project's expected return

d.

To decide whether to accept or reject the project

Discuss
Answer: (d).To decide whether to accept or reject the project Explanation:The purpose of comparing the Internal Rate of Return (IRR) to a hurdle rate is to decide whether to accept or reject the project. If IRR exceeds the hurdle rate, the project should be accepted; otherwise, it should be rejected.
Q49.
What is a limitation of the Internal Rate of Return (IRR) when comparing two or more projects to select the best one?

a.

IRR cannot be used when cash flows are not conventional

b.

IRR fails to consider the time value of money

c.

IRR assumes reinvestment at the same rate as the project

d.

IRR leads to multiple rates of return

Discuss
Answer: (c).IRR assumes reinvestment at the same rate as the project Explanation:The limitation of IRR when comparing two or more projects to select the best one is that IRR assumes interim positive cash flows are reinvested at the rate as that of the project that generated them.
Q50.
What is a drawback of the Internal Rate of Return (IRR) when cash flows are non-conventional?

a.

IRR leads to multiple rates of return

b.

IRR cannot be used effectively

c.

IRR fails to consider the time value of money

d.

IRR cannot distinguish between lending and borrowing

Discuss
Answer: (a).IRR leads to multiple rates of return Explanation:When cash flows are non-conventional, IRR may lead to multiple rates of return, which is a drawback of the method.
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