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US CMA Part 2 Capital Budgeting — practice questions

Explore 23 free Capital Budgeting questions in US CMA Part 2 Finance. 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 1–23 of 23.

Net present value is the present value of the cash inflows less the present value of:Read the answer and worked solution →A project with a positive net present value should be:Read the answer and worked solution →A project with a negative net present value should be:Read the answer and worked solution →The principal advantage of the payback period method is its:Read the answer and worked solution →The internal rate of return sets the present value of the inflows equal to that of the:Read the answer and worked solution →The profitability index takes the same inputs as net present value and converts them into a:Read the answer and worked solution →What does the payback period calculation ignore?Read the answer and worked solution →A third drawback of the payback period method is that it ignores cash flows arriving:Read the answer and worked solution →If the internal rate of return is greater than the cost of capital, the project should be:Read the answer and worked solution →The internal rate of return is the discount rate at which the NPV profile graph crosses the:Read the answer and worked solution →When net present value is greater than zero, the profitability index will be:Read the answer and worked solution →The numerator of the profitability index formula is the present value of the project's:Read the answer and worked solution →The modified internal rate of return compounds all of the cash flows at the:Read the answer and worked solution →Why can the modified internal rate of return not be used to rank projects?Read the answer and worked solution →The reinvestment assumption criticised in the IRR method is that cash flows are reinvested at the:Read the answer and worked solution →The NPV method and the profitability index method will always agree on:Read the answer and worked solution →A machine costs $16,000 and the added cash inflow recovers that cost over four years. Payback is:Read the answer and worked solution →The discounted payback period improves on plain payback by first doing what to the cash flows?Read the answer and worked solution →Accept it or reject itRead the answer and worked solution →Leave the strength standingRead the answer and worked solution →Spot the false ruleRead the answer and worked solution →Which figure is higherRead the answer and worked solution →Find the crossover rateRead the answer and worked solution →

Worked practice questions

Net present value is the present value of the cash inflows less the present value of:

  1. Cash outflows
  2. Bank branches
  3. Board members
  4. Stock brokers
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Correct answer: A. Cash outflows

1. Every project has money going out as well as money coming in. 2. Both streams are pulled back to today before they are compared. 3. The difference between those two present values is net present value. 4. So the amount subtracted is the present value of the cash outflows. _Source: OpenStax Principles of Finance (CC BY 4.0), Ch 16 'How Companies Think about Investing', sections 16.1-16.5_

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A project with a positive net present value should be:

  1. Duplicated
  2. Accepted
  3. Cancelled
  4. Postponed
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Correct answer: B. Accepted

1. Net present value measures the value a project creates. 2. A positive figure means the project adds value. 3. Projects with a positive NPV should be accepted. 4. So the decision is to accept. _Source: OpenStax Principles of Finance (CC BY 4.0), Ch 16 'How Companies Think about Investing', sections 16.1-16.5_

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A project with a negative net present value should be:

  1. Rejected
  2. Repeated
  3. Extended
  4. Rewarded
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Correct answer: A. Rejected

1. A negative net present value means the project destroys value. 2. Projects with a negative NPV should be rejected. 3. Managers should reject any project with a negative NPV. 4. So the decision is to reject. _Source: OpenStax Principles of Finance (CC BY 4.0), Ch 16 'How Companies Think about Investing', sections 16.1-16.5_

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Financial Ratio AnalysisRisk and ReturnWorking Capital ManagementTime Value of Money