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MBA Finance Capital Budgeting — practice questions

Explore 24 free Capital Budgeting questions in MBA Finance 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 1–24 of 24.

A sports shop spends 16,000 on a machine and expects inflows of 2,000, 4,000, 5,000, 5,000 and 5,000. Its payback period is:Read the answer and worked solution →The principal advantage claimed for the payback method is its:Read the answer and worked solution →The first shortcoming of the payback method is that it ignores the:Read the answer and worked solution →The method that fixes that flaw by discounting each inflow before adding it is the:Read the answer and worked solution →Spending money today hoping for more money later means inflows and outflows occur in different:Read the answer and worked solution →The measure that converts all a project's cash flows into today's rupees and nets them is the:Read the answer and worked solution →The rate a firm should theoretically use when discounting for that measure is its:Read the answer and worked solution →The discount rate at which that measure equals zero is the:Read the answer and worked solution →The measure that divides the present value of benefits by the present value of costs is the:Read the answer and worked solution →When the net present value of a project is greater than zero, that ratio will be:Read the answer and worked solution →Two machines that cannot both be bought, so only one may be chosen, are described as:Read the answer and worked solution →In the comparison offered, the heavy-duty machine costs:Read the answer and worked solution →The reason a firm might still prefer that costlier machine is that it will generate more:Read the answer and worked solution →The payback measure is described as giving managers information about how long money will be:Read the answer and worked solution →When using the payback method, a company must itself set a length of time as its:Read the answer and worked solution →Compared with payback, both the net present value and the internal rate of return take account of:Read the answer and worked solution →Catch the appraisal toolsRead the answer and worked solution →Pop the discounting methodsRead the answer and worked solution →Run the appraisal gatesRead the answer and worked solution →Slice the appraisal wordsRead the answer and worked solution →Counts timing or notRead the answer and worked solution →Sort the appraisal factsRead the answer and worked solution →Type the numberRead the answer and worked solution →Capital budgeting bingoRead the answer and worked solution →

Worked practice questions

A sports shop spends 16,000 on a machine and expects inflows of 2,000, 4,000, 5,000, 5,000 and 5,000. Its payback period is:

  1. 4 years
  2. 3 years
  3. 5 years
  4. 2 years
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Correct answer: A. 4 years

1. Add the inflows year by year. 2. They reach 16,000 at the end of year four. 3. The payback period is 4 years. _Source: OpenStax Principles of Finance 2e, Chapter 16, How Companies Think about Investing._

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The principal advantage claimed for the payback method is its:

  1. Symmetry
  2. Simplicity
  3. Severity
  4. Secrecy
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Correct answer: B. Simplicity

1. It is quick and easy to work out. 2. Managers without finance training grasp it. 3. The advantage is simplicity. _Source: OpenStax Principles of Finance 2e, Chapter 16, How Companies Think about Investing._

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The first shortcoming of the payback method is that it ignores the:

  1. Trade value of goods
  2. Term value of loans
  3. Time value of money
  4. Total value of stock
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Correct answer: C. Time value of money

1. All future rupees are treated alike. 2. Waiting is not penalised. 3. It ignores the time value of money. _Source: OpenStax Principles of Finance 2e, Chapter 16, How Companies Think about Investing._

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