Quiz Module 12 ?s Flashcards
Which definition is a correct description of a capital budgeting method?
Equivalent annuity method essentially value projects as if they were risk bonds.
The profitability index is the time required for an investment to “repay” the original investment.
The internal rate of return is the discount rate that gives a net present value of zero.
Real option analysis is the ratio of payoff to investment of a proposed project.
The internal rate of return is the discount rate that gives a net present value of zero.
Which of the following is a function of corporate capital budgeting?
To rank projects by profitability
To provide a history of past revenues and expenditures
To encourage managers to operate independently of other business operations and departments
To assist managers with reacting to problems after they arise
To rank projects by profitability
A firm is trying to choose the most profitable project to invest in. Which feature should be used as the company’s discount rate?
The company’s weighted average cost of capital
The company’s profitability index
The company’s reinvestment rate
The company’s internal rate of return
The company’s reinvestment rate
Which statement reflects the best reason to use the payback method to evaluate investments?
The payback method covers all cash inflows and outflows for the duration of the investment.
If you use the payback method, you do not need to perform additional analyses.
The payback method helps gauge a project’s risk.
The payback method is easy to use and understandable for most people, regardless of training.
The payback method is easy to use and understandable for most people, regardless of training.
Which investment proposal ranking method is widely used due to its simplicity, despite having several limitations?
Profitability Index
Net Present Value (NPV)
Payback period
Internal Rate of Return (IRR)
Payback period
