TYBCOM SEM 5
Financial Management
Video: MCQ of Capital Budgeting
1. Mutually exclusive projects can be more accurately ranked as per-
(A) Internal rate of return method
(B) Net present value method
(C) modified internal rate of returns method
(D) accounting or average rate of return method
Ans: B
2. Assertion (A): When two or more investment proposals are mutually exclusive, ranking the proposals on the basis of IRR, NPV and PI methods may give contradictory results.
Reason: The contradictory results in the ranking are due to differing dimensions relating to scale of investments, cash flow pattern and project lives.Indicate the correct answer:
(A) Both (A) and are true.
(B) (A) is true, but (R) is a necessary condition, but not a sufficient condition.
(C) Both (A) and (R) are false.
(D) Both (A) and (R) are true and (R) explains the reason sufficiently.
Ans:B
3. Assertion (A): Weighted Average cost of capital should be used as a hurdle rate for accepting or rejecting a capital budgeting proposal.
Reason (R): It is because by financing in the proportions specified and accepting the project, yielding more than the weighted average required return, the firm is able to increase the market price of its stock.
(A) Both (A) and (R) are false.
(B) Both (A) and (R) are true.
(C) (A) is true, while (R) is false.
(D) (A) is false, while (R) is true.
Ans:B
4. Interim cash inflows are reinvested at a rate of return equal to the internal rate of return is the build-in mechanism for-
(A) Net Present Value Method
(B) Internal Rate of Return Method
(C) Profitability Index Method
(D) None of the above
Ans:B
5. In capital Budgeting, the term capital rationing implies:
(A) That no retained earnings are available.
(B) That limited funds are available for investment.
(C) That no external funds can be raised.
(D) That no fresh investment is required in current year.
Ans:B
6. Which of the following is not true with reference to capital budgeting.
(A) Capital budgeting related to asset replacement decisions. Jan, 2017
(B) Cost of capital is equal to minimum required return.
(C) Existing investment in a project is not treated as sunk cost.
(D) Timing of Cash Flows is relevant.
Ans:C
7. Which of the following techniques for appraisal of investment proposals are based on time value of money?
(A) Accounting Rate of Return
(B) Internal Rate of Return
(C) Profitability Index Method
(D) Earnings Per Share
Code:
(1) (a) and (b)
(2) (b) and (c)
(3) (a) and (d)
(4) (a), (b) and (d)
Ans: 2
8. Formula for net cash inflow of a project is:
(A) Sales - Operating Expenses – Interest - Tax
(B) Sales - Operating Expenses
(C) Net Profit after tax + Depreciation
(D) Gross Profit + Depreciation
Ans:C
9. Which of the following is not a feature of payback period method?
(A) It is simply a method of cost recovery and not of profitability.
(B) It does not consider the time value of money.
(C) It down not considers the risk associated with the projects.
(D) It is very difficult to calculate.
Ans: D
10. From the following techniques of capital budgeting decision, indicate the correct combination of
discounting techniques:
I. Profitability index
II. Net present value
III. Accounting rate of return
IV. Internal rate of return
(1) I II III
(2) II III IV
(3) I II IV
(4) I III IV
Ans: 3
11. Debt Financing is a cheaper source of finance because of
(1) Time Value of money
(2) Rate of Interest
(3) Tax deductibility of interest
(4) Dividends are not payable to lenders
Ans:3
12. Which of the following statement is false?
(1) The Opportunity cost of an input is considered in capital budgeting
(2) Capital budgeting decisions are reversible in nature
(3) Cash flows and accounting profits are different
(4) An expansion decision is a capital budgeting decision
Ans:2
13. Which one of the following equates the present value of cash outflows and the present value of expected cash
inflows from a project? Nov. 2017
(1) Net present value
(2) Internal rate of return
(3) Payback period
(4) Accounting rate of return
Ans: 2
14. Profitability Index of a project is the ratio of present value of cash inflows to: July 2018
(1) Total cash inflows
(2) Total cash outflows
(3) Present value of cash outflows
(4) Initial cost minus Depreciation
Ans:3
15. Which one of the following methods of capital budgeting assumes that cash-inflows are reinvested at the
project’s rate of return? July 2018
(1) Net Present value
(2) Accounting rate of return
(3) Internal rate of return
(4) Discounted Payback period
Ans:3
16. A capital budgeting technique which does not require the computation of cost of capital for decision making purposes is,
(a) Net Present Value method
(b) Internal Rate of Return method
(c) Modified Internal Rate of Return method
(d) Pay back
Ans: D
17. If two alternative proposals are such that the acceptance of one shall exclude the possibility of the acceptance of another then such decision making will lead to,
(a) Mutually exclusive decisions
(b) Accept reject decisions
(c) Contingent decisions
(d) None of the above
Ans:A
18. In case a company considers a discounting factor higher than the cost of capital for arriving at present values, the present values of cash inflows will be
(a) Less than those computed on the basis of cost of capital
(b) More than those computed on the basis of cost of capital
(c) Equal to those computed on the basis of the cost of capital
(d) None of the above
Ans:A
19. The pay back technique is specially useful during times
(a) When the value of money is turbulent
(b) When there is no inflation
(c) When the economy is growing at a steady rate coupled with minimal
inflation.
(d) None of the above
Ans:A
20. While evaluating capital investment proposals, time value of money is used in which of the following techniques,
(a) Payback method
(b) Accounting rate of return
(c) Net present value
(d) None of the above
Ans:C
21. IRR would favour project proposals which have,
(a) Heavy cash inflows in the early stages of the project.
(b) Evenly distributed cash inflows throughout the project.
(c) Heavy cash inflows at the later stages of the project
(d) None of the above.
Ans: A
22. The re- investment assumption in the case of the IRR technique assumes that,
(a) Cash flows can be re- invested at the projects IRR
(b) Cash flows can be re- invested at the weighted cost of capital
(c) Cash flows can be re- invested at the marginal cost of capital
(d) None of the above
Ans:A
23. Multiple IRR are obtained when,
(a) Cash flows in the early stages of the project exceed cash flows during the
later stages.
(b) Cash flows reverse their signs during the project
(c) Cash flows are uneven
(d) None of the above.
Ans:B
24. Depreciation is included as a cost in which of the following techniques,
(a) Accounting rate of return
(b) Net present value
(c) Internal rate of return
(d) None of the above
Ans:A
25. Management is considering a 1,00,000 investment in a project with a 5 year life and no residual value . If the total income from the project is expected to be `60,000 and recognition is given to the effect of straight line depreciation on the investment, the average rate of return is :
(a) 12%
(b) 24%
(c) 60%
(d) 75%
Ans:B
26. Assume cash outflow equals ` 1,20,000 followed by cash inflows of ` 25,000 per year for 8 years and a cost of capital of 11%. What is the Net present value?
(a) (` 38,214)
(b) ` 9,653
(c) ` 8,653
(d) ` 38,214
Ans:C
27. What is the Internal rate of return for a project having cash flows of ` 40,000 per year for 10 years and a cost of ` 2,26,009?
(a) 8%
(b) 9%
(c) 10%
(d) 12%
Ans:D
28. While evaluating investments, the release of working capital at the end of the projects life should be considered as,
(a) Cash in flow
(b) Cash out flow
(c) Having no effect upon the capital budgeting decision
(d) None of the above.
Ans:A
29. Capital rationing refers to a situation where,
(a) Funds are restricted and the management has to choose from amongst available alternative investments.
(b) Funds are unlimited and the management has to decide how to allocate them to suitable projects.
(c) Very few feasible investment proposals are available with the management.
(d) None of the above
Ans:A
30. Capital budgeting is done for
(a) Evaluating short term investment decisions.
(b) Evaluating medium term investment decisions.
(c) Evaluating long term investment decisions.
(d) None of the above
Ans: C
31. Capital Budgeting is a part of:
(a)Investment Decision
(b) Working Capital Management
(c) Marketing Management
(d) Capital Structure
Ans:A
32. Capital Budgeting deals with:
(a) Long-term Decisions
(b) Short-term Decisions
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Ans: A
33. Project can be accepted, based on PBP if it is
a) < standard PBP
b) > standard PBP
c) = standard PBP
d) None of the above
Ans : A
3. CFBT = 2,00,000 p.a. , Life = 4 years
DF = 10% , Tax = 50%
Initial investment = 4,00,000
NPV = ?
a) 475350
b) 75350
c) 233800
d) None of the above
1. Which of the following is not a feature of capital budgeting
a) Decisions are non - repetitive
b) Returns in future and uncertain
c) Irreversible decisions
d) None of the above
Ans: A
2. Factors affecting capital budgeting decision
a) Cash flows
b) Company policy
c) Vision
d) All of the above
Ans: D
3. Traditional method excludes
a) Payback period
b) ARR
c) Profitability index
d) None of the above
Ans : A
4. Modern method includes
a) NPV
b) Discounted PBP
c) IRR
d) All of the above
Ans: D
6. NPV stands for
a) Non present variable
b) Net post variance
c) Net present value
d) Net pre value
7. IRR stands for
a) Indian rate of return b) Internal rate of return
c) Increasing rate of return d) None of the above
8. At IRR,
a) NPV = O b) NPV is positive
c) NPV is negative d) None of the above
9. IRR is used as
a) Return on investment b) Cut off rate
c) Debt equity ratio d) None of the above
10. ARR stands for
a) Actual rate of return b) Average rate of return
c) Accumulated rate of return d) None of the above
11. ARR = Average NPAT / ? × 100
a) Closing investment b) Average investment
c) Salvage d) None of the above
12. Average investment =
a) Initial investment
b) Initial investment/2
c) Initial investment salvage/2
d) None of the above
13. Which of the following is the demerit of PBP
a) Emphasizes liquidity b) Easy to understand
c) Ignores time value of money d) All of the above
14. NPV =
a) Cash outflow – cash inflow
b) PVCI - PVCO
c) PVCI + PVCO
d) None of the above
Ans: B
15. PI =
a) PVCI – PVCO
b) PVCO-PVCI
c) PVCI / PVCO
d) None of the above
Ans: C
16. Capital rationing means
a) Adequate capital b) More capital
c) Less capital d) None of the above
Ans: B
17. Sensitivity analysis measures risk by using
a) One variable at a time b) Majority of variables at a time
c) All variables d) None of the above
18. What is the PV factor of 4th year at 10%
a) 0.751 b) 0.683 c) 0.621 d) None of the above
Ans : B
19. What is the total PV factor of 4 years at 12%
a) 0.893 b) 0.797 c) 0.636 d) None of the above
Ans: C
20. Outflow = 3,50,000
Life = 4 years
CFAT = 1,00,000 p.a.
IRR = ?
a) 5% b) 5.61% c) 5.74% d) None of the above
Ans:A
24. Investment = 5 lakhs
Life = 5 years
CFAT = 2 lakhs
PBR = ?
a) 2.5 years b) 40% c) Either a or b d) None of the above
Ans:A
25. What is the effect on cash inflow of tax on profit on sale
a) Deducted b) Added c) Multiply d) Divide
Ans: A
26. What is the effect of tax on loss on sale of on cash inflow
a) Added b) Minus c) Multiply d) Ignore
Ans: B
27. What is the amount of capital gain tax/ tax saving from the following data
Cost of asset 1,000,000
Salvage 50,000
Life 5 years
Depreciate 20% on WDV
Tax 50%
a) 327680 b) 277680 c) 138840 d) None of the above
29. If 2 projects/ machines have different life, then decision depends on
a) Annual returns b) Annualized PVCI
c) Annualized NPV d) NOTA
31. CFAT = 40,000
Life = 4 years
IRR = 15%
PVCO = ?
a) 2,66,667 b) 1,14,200 c) 1,18,000 d) 2,50,000
Ans: B
PVCO= 2.855*40000
=pv facotor* cfat
32. Nominal rate of return = 14%
Inflation rate = 7%
Real rate of return = ?
a) 14% b) 7% c) 6.54 d) NOTA
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