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CA Final Capital Budgeting — practice questions — page 2

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 31–60 of 83.

In valuing a real option, the strike price corresponds to the project'sRead the answer and worked solution →Project volatility for a real option is usually derived throughRead the answer and worked solution →Compared with plain NPV, a project's real options value is typicallyRead the answer and worked solution →Other things equal, higher volatility of the underlying project value leads toRead the answer and worked solution →A real option differs from a financial option because managementRead the answer and worked solution →A sequencing option concerns the timing ofRead the answer and worked solution →A patent holder should develop the product only if PV of expected sales cash flowsRead the answer and worked solution →A project built with spare capacity to allow expansion costs more; the extra cost is theRead the answer and worked solution →A plant with expansion capacity costs Rs 12 crore against Rs 10 crore for one without. The option premium isRead the answer and worked solution →Real options analysis values managerial choices and thenRead the answer and worked solution →Payback period measures the time needed toRead the answer and worked solution →A major limitation of the payback period is that itRead the answer and worked solution →A Rs 1,000 investment returns Rs 500 at the end of each of two years. The payback period isRead the answer and worked solution →A project costs Rs 1,00,000 and returns Rs 40,000, Rs 50,000 and Rs 60,000 in years 1 to 3. Payback in years is aboutRead the answer and worked solution →Payback can be made to reflect time value by applyingRead the answer and worked solution →Accounting rate of return is computed fromRead the answer and worked solution →ARR disregardsRead the answer and worked solution →ARR can be easily manipulated by changing theRead the answer and worked solution →An asset costs Rs 90,000 with Rs 10,000 book value at end of life. Average investment isRead the answer and worked solution →The profitability index is the ratio ofRead the answer and worked solution →A profitability index of 1 indicatesRead the answer and worked solution →Profitability index is useful because itRead the answer and worked solution →PV of inflows is Rs 1,50,000 on an investment of Rs 1,00,000. The profitability index isRead the answer and worked solution →A project with investment Rs 80,000 has PI of 1.25. Its NPV isRead the answer and worked solution →After clearing the hurdle, projects are ranked from highest to lowestRead the answer and worked solution →Budget is Rs 80 lakh; each project needs Rs 40 lakh with PI of A 1.5, B 1.2, C 1.3. Which pair is chosen?Read the answer and worked solution →Capital budgeting aims to increase the value of the firm to itsRead the answer and worked solution →Why is capital budgeting such a vital task?Read the answer and worked solution →Retained earnings as a source of capital areRead the answer and worked solution →Which method do economists consider improper, being based on accounting earnings?Read the answer and worked solution →

Worked practice questions

In valuing a real option, the strike price corresponds to the project's

  1. investment outlays
  2. annual depreciation
  3. tax shield amount
  4. equity beta value
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Correct answer: A. investment outlays

The cost the firm must spend to proceed is what it pays to exercise, so it plays the role of the strike.

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Project volatility for a real option is usually derived through

  1. bank statements
  2. payback analysis
  3. Monte Carlo method
  4. ratio trending
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Correct answer: C. Monte Carlo method

Simulating the project's possible cash flow paths gives an estimate of the volatility of its value.

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Compared with plain NPV, a project's real options value is typically

  1. lower
  2. identical
  3. higher
  4. negative
Show answer and solution

Correct answer: C. higher

Real options add the value of management's flexibility, which standard NPV assumes away.

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