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web.groovymark@gmail.com
- December 14, 2024
Question 41
The cash flows of a contingent project:
a) Depend on the cash flows of another project.
b) Are independent of other projects.
c) Are always positive.
d) Are greater than those of a mutually exclusive project.
Answer: a) Depend on the cash flows of another project.
Explanation: Contingent projects are dependent on the outcomes or acceptance of other projects for their viability.
Question 42
The internal rate of return (IRR) decision rule states that a project should be accepted if:
a) The IRR is greater than the firm’s cost of capital.
b) The IRR is less than the payback period.
c) The IRR is negative.
d) The IRR is greater than the firm’s net income.
Answer: a) The IRR is greater than the firm’s cost of capital.
Explanation: A project is accepted if its IRR exceeds the firm’s cost of capital because it indicates the project will add value to the firm.
Question 43
Which of the following is not considered an incremental cash flow in project analysis?
a) The initial investment in equipment.
b) Additional sales generated by the project.
c) Sunk costs.
d) Increases in net working capital.
Answer: c) Sunk costs.
Explanation: Sunk costs are not included in incremental cash flow calculations because they have already been incurred and cannot be recovered.
Question 44
A project with a higher degree of operating leverage is:
a) More likely to generate constant returns.
b) More sensitive to changes in sales.
c) Less sensitive to changes in variable costs.
d) Less risky for the firm.
Answer: b) More sensitive to changes in sales.
Explanation: Projects with higher operating leverage have a higher proportion of fixed costs, making them more sensitive to changes in sales.
Question 45
The profitability index (PI) helps to measure:
a) The absolute amount of value created by a project.
b) The relative value created per unit of investment.
c) The internal rate of return of the project.
d) The payback period of the project.
Answer: b) The relative value created per unit of investment.
Explanation: The profitability index compares the value generated by a project to the amount invested, helping assess its efficiency.
Question 46
When evaluating mutually exclusive projects, which method is considered the best decision criterion?
a) Profitability index.
b) Net present value.
c) Payback period.
d) Internal rate of return.
Answer: b) Net present value.
Explanation: NPV is the best criterion for evaluating mutually exclusive projects because it considers both the time value of money and total value creation.
Question 47
In capital budgeting, an independent project is one where:
a) Its acceptance or rejection does not affect other projects.
b) It is dependent on the acceptance of another project.
c) It must be accepted if a mutually exclusive project is rejected.
d) It has the same IRR as another project.
Answer: a) Its acceptance or rejection does not affect other projects.
Explanation: Independent projects can be evaluated and accepted or rejected without impacting the evaluation of other projects.
Question 48
In the capital budgeting process, what is the main advantage of the NPV method over the IRR method?
a) NPV does not require estimating the discount rate.
b) NPV always provides a higher project value.
c) NPV is easier to calculate without a financial calculator.
d) NPV can handle multiple discount rates.
Answer: d) NPV can handle multiple discount rates.
Explanation: Unlike IRR, the NPV method can accommodate changing discount rates over time, making it more flexible for real-world situations.
Question 49
Which of the following correctly describes the payback period?
a) It accounts for the time value of money.
b) It considers all project cash flows.
c) It measures how long it takes for a project to recover its initial investment.
d) It provides a comprehensive measure of project profitability.
Answer: c) It measures how long it takes for a project to recover its initial investment.
Explanation: The payback period focuses on the time needed to recoup the initial investment without considering profitability or time value of money.
Question 50
When using the discounted payback period method, a project is accepted if:
a) Its payback period is shorter than its life.
b) It generates cash flows beyond the payback period.
c) It recovers the initial investment in present value terms within a specified period.
d) Its NPV is zero.
Answer: c) It recovers the initial investment in present value terms within a specified period.
Explanation: The discounted payback period evaluates whether the present value of cash inflows recovers the initial investment within a set period.
