Capital Budgeting is the process of making financial decisions regarding investing in long-term assets for a business. It involves conducting a thorough evaluation of risks and returns before approving or rejecting a prospective investment decision. This process is also known as investment appraisal. Capital budgeting decisions are a part of the overall financial management process for a firm.
Decisions like constructing a new factory, purchasing heavy machinery for production or making a significant investment in an outside business entity are examples of Capital Budgeting. Below is a list of multiple-choice questions and answers on Capital Budgeting to help students understand the importance of this process in a company’s overall decision making. Answer: d Answer: c Answer: c Answer: a
- Selecting a project with a lower cost of capital
- Selecting a project with the quickest payback
- Selecting a project with the longest payback
- Selecting a project with the highest net present value
Answer: b
- The project will have more Net Present Value
- The project will have less Net Present Value
- The project carries a greater amount of risk
- The project carries a lesser amount of risk
Answer: d
- Investment period
- Redemption period
- Payback period
- Maturity period
Answer: c
- The Profitability Index should be greater than unity
- The Internal Rate of Return should be greater than the cost of capital
- The Net Present Value should be greater than zero
- All of the above
Answer: d
- The project will have a lesser risk
- The project will have less Net Present Value
- The project will have more Net Present Value
- The project will have a greater risk
Answer: a
- Weighted average, cost of capital
- Weighted average, component cost
- Unweighted average, cost of capital
- None of the above
Answer: a
- Economic profit is based on cash flows, while accounting profit is based on specific rules for accountancy
- Accounting profit includes the last accounting period, while economic profit includes the entire life of a firm’s existence
- Accounting profit has a small charge for debt, but economic profit has a small charge for the providers of capital
- All of the above
Answer: d
- It does not take into account the cost of capital and timing of return
- When compared to the accounting rate of return method, it is more difficult to calculate and understand
- It does not take the initial investment into account
- All of the above
Answer: a
- It does not take into account the cost of capital and timing of return
- If a firm is divided then the units will also have a separate rate of return
- Both a and b are correct
- None of the above
Answer: a
- It is used for projects with independent cash flows
- It is used for making a decision to either accept or reject a proposal
- It is used for sequential decisions
- None of the above
Answer: a
- It will have the lowest opportunity loss
- It will have the highest expected net present value
- It will have the highest standard deviation of the net present value
- It will have the highest coefficient of variation of the net present value
Answer: d
- Purchasing new machinery to replace an existing one
- Transferring money to your creditor’s account
- Payment of electricity bill for your factory
- None of the above
Answer: a
- Dividend decision
- Working capital decision
- Capital Budgeting decision
- None of the above
Answer: c
- The rate of cash discount
- Time value of money
- The required rate of return
- None of the above
Answer: a
- Post-tax principle
- Accrual principle
- Cash flows principle
- None of the above
Answer: b
- The timing of cash flows is relevant
- The existing investment within a project is not considered as the sunk cost
- The cost of capital is equal to the minimum required rate of return
- The capital budgeting is only related to the asset replacement decisions
Answer: b
Also See:
- Difference between Cost Accounting and Management Accounting
- Difference between Wholesale Price Index and Consumer Price Index
- Financial statements of a company