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.

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Capital Budgeting or Capital Investment Decisions MCQs | Page 6 of 7

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Q51.
What is the purpose of the Modified Internal Rate of Return (MIRR) technique?

a.

To assume interim positive cash flows are reinvested at the project's rate

b.

To overcome the drawbacks of the Net Present Value (NPV) method

c.

To assume interim positive cash flows are reinvested at the firm's rate of return

d.

To calculate the present value of terminal values

Discuss
Answer: (c).To assume interim positive cash flows are reinvested at the firm's rate of return Explanation:The purpose of the Modified Internal Rate of Return (MIRR) technique is to assume that interim positive cash flows are reinvested at the firm's rate of return, overcoming the unrealistic assumption of IRR.
Q52.
What does the MIRR calculation involve?

a.

Calculating the present value of the costs of the project using the project's rate of return

b.

Calculating the present value of the costs of the project using the firm's rate of return

c.

Calculating the future value of the costs of the project using the project's rate of return

d.

Calculating the future value of the costs of the project using the firm's rate of return

Discuss
Answer: (b).Calculating the present value of the costs of the project using the firm's rate of return Explanation:The MIRR calculation involves calculating the present value of the costs of the project using the firm's rate of return as the discount rate.
Q53.
How is the terminal value (TV) of the Cash inflows expected from the project calculated in the Modified Internal Rate of Return (MIRR) method?

a.

TV = ฮฃ Cash Outflow_t / (1 + r)^t

b.

TV = ฮฃ Cash Outflow_t * (1 + r)^t

c.

TV = ฮฃ Cash Outflow_t * (1 + MIRR)^t

d.

TV = ฮฃ Cash Outflow_t / (1 + MIRR)^t

Discuss
Answer: (a).TV = ฮฃ Cash Outflow_t / (1 + r)^t Explanation:The terminal value (TV) of the Cash inflows expected from the project in the MIRR method is calculated using the formula TV = ฮฃ Cash Outflow_t / (1 + r)^t.
Q54.
How is capital budgeting defined?

a.

"The firm's decision to invest its current assets most efficiently and effectively in short-term projects for good ROI"

b.

"The firm's decision to invest its long-term projects with the objective of earning good Return on Investment (ROI)"

c.

"The firm's decision to invest its current assets most efficiently and effectively in both short-term and long-term projects"

d.

"The firm's decision to invest its financial assets most efficiently and effectively in long-term projects for good ROI"

Discuss
Answer: (b)."The firm's decision to invest its long-term projects with the objective of earning good Return on Investment (ROI)" Explanation:The definition of capital budgeting is: "The firm's decision to invest its current assets most efficiently and effectively in the long-term projects and activities with the objective of earning good Return on Investment (ROI)."
Q55.
What are the steps involved in the capital budgeting process?

a.

i. Identification of the proposed investments; ii. Assessing and evaluation of proposed investments; iii. Decision-making

b.

i. Identification of the proposed investments; ii. Assessing and evaluation of proposed investments; iii. Taking Decision; iv. Implementation of Capital Budget

c.

i. Identification of the proposed investments; ii. Taking Decision; iii. Implementation of Capital Budget; iv. Periodical review of project-performance

d.

i. Assessing and evaluation of proposed investments; ii. Taking Decision; iii. Preparation of capital budget and allocation of resources

Discuss
Answer: (b).i. Identification of the proposed investments; ii. Assessing and evaluation of proposed investments; iii. Taking Decision; iv. Implementation of Capital Budget Explanation:The steps involved in the capital budgeting process are: i. Identification of the proposed investments; ii. Assessing and evaluation of proposed investments; iii. Taking Decision; iv. Implementation of Capital Budget.
Q56.
What principle does the Pay-back Method rely on to determine the worthiness of a project?

a.

The longer the pay-back period, the better the project

b.

The shorter the pay-back period, the better the project

c.

The pay-back period is irrelevant to project worthiness

d.

The pay-back period is determined by the average rate of return

Discuss
Answer: (b).The shorter the pay-back period, the better the project Explanation:Under the Pay-back Method, the worthiness of the project depends on the principle that the shorter the pay-back period, the better or more desirable is the project.
Q57.
In the context of the Rate of Return on Original Investment method, what does management do to accept a project?

a.

Accept any project with a positive rate of return

b.

Select and accept the project with the highest rate of return

c.

Accept any project with a rate of return equal to zero

d.

Accept any project with a rate of return equal to the cost of capital

Discuss
Answer: (b).Select and accept the project with the highest rate of return Explanation:Under the Rate of Return on Original Investment method, management selects and accepts the project with a rate of return equal to the pre-determined cut-off rate of return.
Q58.
What principle does the Discounted Cash Flow (DCF) Method rely on?

a.

The longer the cash inflows, the better the project

b.

The shorter the cash inflows, the better the project

c.

Recognizing the time value of money, where money in hand is worth more than money received later

d.

Ignoring the time value of money in project evaluation

Discuss
Answer: (c).Recognizing the time value of money, where money in hand is worth more than money received later Explanation:The Discounted Cash Flow (DCF) Method uses the Time Value of money principle, recognizing the fact that the use of money involves cost, and the money in hand is worth more than the money to be received later.
Q59.
What does the Net Present Value (NPV) rule say about project acceptability?

a.

If the NPV is negative, the project is acceptable

b.

If the NPV is positive, the project is avoidable

c.

If the NPV is positive, the project is acceptable; if negative, it is avoidable

d.

NPV is irrelevant to project acceptability

Discuss
Answer: (c).If the NPV is positive, the project is acceptable; if negative, it is avoidable Explanation:NPV rules say, "If the net present is positive, the project is acceptable, and if negative, it is avoidable." A project with a higher NPV is preferred where there are alternatives available.
Q60.
How is the Internal Rate of Return (IRR) on a project defined?

a.

The return that equals the present value of the discounted net cash flows on the project to exactly zero

b.

The highest rate of return a project can achieve

c.

The return that guarantees the highest NPV

d.

The return that equals the cost of capital

Discuss
Answer: (a).The return that equals the present value of the discounted net cash flows on the project to exactly zero Explanation:The Internal Rate of Return (IRR) on a project is defined as the return that equates the present value of the discounted net cash flows on the project to exactly zero.
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