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CA Inter Capital Budgeting — practice questions

Explore 36 free Capital Budgeting questions in CA Inter Financial Management. 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 36.

What is the core purpose of capital budgeting?Read the answer and worked solution →What is the underlying goal of capital budgeting for a firm?Read the answer and worked solution →How is capital budgeting typically viewed within most firms?Read the answer and worked solution →Money invested by shareholders who purchase the company's stock is known as what?Read the answer and worked solution →Borrowed cash such as bank loans or bonds issued to creditors is called what?Read the answer and worked solution →Why does the amount of money matter in capital budgeting?Read the answer and worked solution →Long term investments, once made, cannot be reversed without what?Read the answer and worked solution →An investment that cannot be readily recovered once made is described as what?Read the answer and worked solution →Compared with short run decisions, capital budgeting carries what?Read the answer and worked solution →Which of these is a formal method used in capital budgeting?Read the answer and worked solution →In the NPV method, cash flows are discounted at which rate?Read the answer and worked solution →With no capital limit and independent projects, which are accepted?Read the answer and worked solution →Two machines doing the same task are best treated as what?Read the answer and worked solution →For a simple project with an outflow first and inflows later, IRR above cost of capital means what?Read the answer and worked solution →When may a project have more than one IRR?Read the answer and worked solution →For a borrower, which IRR on a loan is preferable?Read the answer and worked solution →Which measure was designed to overcome the reinvestment problem of IRR?Read the answer and worked solution →The equivalent annual cost method implies what about the project?Read the answer and worked solution →Under the chain method, a 3 year and a 4 year project are compared over how many years?Read the answer and worked solution →After ranking, the highest ranked projects are implemented until when?Read the answer and worked solution →The profitability index is the PV of future cash flows divided by what?Read the answer and worked solution →A profitability index of exactly 1 indicates what?Read the answer and worked solution →A profitability index below one means the project's PV is what?Read the answer and worked solution →Which of these is another name for the profitability index?Read the answer and worked solution →A firm spends Rs 1,50,000 on a project with NPV of Rs 30,000. What is its profitability index?Read the answer and worked solution →Inflows worth Rs 5,60,000 in present value cost Rs 5,00,000 today. What is the NPV?Read the answer and worked solution →A Rs 40,000 machine gives net cash flow of Rs 8,000 a year. What is its payback period?Read the answer and worked solution →Rs 90,000 is invested and yields Rs 30,000 net cash each year. When is it paid back?Read the answer and worked solution →Which key weakness does the simple payback period have?Read the answer and worked solution →Payback also ignores which part of a project's cash flows?Read the answer and worked solution →

Worked practice questions

What is the core purpose of capital budgeting?

  1. Forecasting monthly product sales
  2. Reconciling bank statements
  3. Allocating funds to major projects
  4. Managing day to day wage cash
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Correct answer: C. Allocating funds to major projects

Capital budgeting is the planning process for allocating resources to major capital or investment expenditures such as plants and machinery.

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What is the underlying goal of capital budgeting for a firm?

  1. Maximising the sales volume in every period
  2. Reducing the number of staff on the payroll
  3. Raising the value of the firm to its shareholders
  4. Minimising the tax paid in each year
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Correct answer: C. Raising the value of the firm to its shareholders

Consistent with corporate finance generally, capital budgeting aims to increase the value of the firm for its shareholders.

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How is capital budgeting typically viewed within most firms?

  1. As a daily operational routine
  2. As a core revenue generating function
  3. As a non-core strategic financial function
  4. As a statutory audit requirement
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Correct answer: C. As a non-core strategic financial function

It is not part of the revenue model or daily operations of most firms, yet it holds a strategic financial function.

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More Financial Management topics

Sources of FinanceCost of Capital BasicsLeverage (Finance)Working CapitalCapital Structure BasicsDividend BasicsCapital Budgeting BasicsDividend Policies