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CA Final Capital Budgeting — practice questions

Explore 83 free Capital Budgeting questions in CA Final Strategicfinancialmanagement. Open each question or exercise to read its content, reference answers and available explanation.

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Capital Budgeting questions and exercises with answers

Showing questions 1–30 of 83.

Which rate is used to discount a project's cash flows to get its NPV?Read the answer and worked solution →With unlimited funds and independent projects, a firm should acceptRead the answer and worked solution →Mutually exclusive projects are those whereRead the answer and worked solution →The internal rate of return is the discount rate that makesRead the answer and worked solution →For a conventional project, IRR above the cost of capital means NPV isRead the answer and worked solution →For a loan-like pattern (cash received first, paid later), which IRR is better for the borrower?Read the answer and worked solution →When may a project's cash flows give several IRRs?Read the answer and worked solution →How is the IRR equation generally solved?Read the answer and worked solution →MIRR was designed to fix which weakness of IRR?Read the answer and worked solution →For projects with alternating positive and negative flows, MIRR givesRead the answer and worked solution →A realistic reinvestment rate for interim inflows is usually closer to the firm'sRead the answer and worked solution →Equivalent annual cost is the cost per year ofRead the answer and worked solution →The EAC method is especially used to compare projects ofRead the answer and worked solution →Using EAC implicitly assumes the project will beRead the answer and worked solution →The chain method with NPV gives answers that are mathematicallyRead the answer and worked solution →Comparing 3-year and 4-year projects by the chain method uses how many repeats of the 3-year project?Read the answer and worked solution →Chained projects with identical cash flows imply zero inflation, so the rate used is commonlyRead the answer and worked solution →Real options valuation applies which techniques to capital budgeting?Read the answer and worked solution →Real options are most valuable whenRead the answer and worked solution →The option to expand a project is equivalent to owning aRead the answer and worked solution →Engineering a project so output can be cut later gives something like aRead the answer and worked solution →A project that can be turned on and off dynamically has a real option also called aRead the answer and worked solution →A good example of a switching option is aRead the answer and worked solution →Selling a project's assets for salvage value when it turns bad exercises aRead the answer and worked solution →A firm should abandon a project when the PV of its remaining cash flowsRead the answer and worked solution →Flexibility to choose when to start a mining project is an American styleRead the answer and worked solution →The option to abandon is also known as aRead the answer and worked solution →The non-recoverable upfront spending that buys flexibility in a real option is theRead the answer and worked solution →A utility switching between fuel sources to make electricity holds anRead the answer and worked solution →Product flexibility, producing different outputs from one facility, is anRead the answer and worked solution →

Worked practice questions

Which rate is used to discount a project's cash flows to get its NPV?

  1. Inflation rate
  2. Bank deposit rate
  3. Dividend yield
  4. Cost of capital
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Correct answer: D. Cost of capital

NPV discounts incremental cash flows at the firm's cost of capital, the return investors require for funding the project.

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With unlimited funds and independent projects, a firm should accept

  1. those with top payback
  2. those with top book profit
  3. only the single largest
  4. those with positive NPV
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Correct answer: D. those with positive NPV

Every positive NPV project adds value to shareholders, so all of them are accepted when funds are not limited.

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Mutually exclusive projects are those where

  1. all must be taken together
  2. each needs the same funds
  3. at most one can be accepted
  4. none can ever be ranked
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Correct answer: C. at most one can be accepted

Accepting one such project, for example one doing the same task, rules out the others.

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