CBS CBS Capital Budgeting & Asset Management 2

Question 1

Which capital budgeting technique is most susceptible to the 'multiple IRR problem'?

Accepted Answer

Internal Rate of Return (IRR)

Answer

IRR can produce multiple solutions when a project's cash flow stream changes sign more than once, making interpretation ambiguous.

Question 2

Incremental cash flows in capital budgeting refer to:

Accepted Answer

The change in overall firm cash flows attributable directly to the project

Answer

Incremental cash flows are the additional cash inflows and outflows that result specifically from undertaking the new project.

Question 3

When evaluating mutually exclusive projects of unequal lives, the most appropriate approach is the:

Accepted Answer

Equivalent Annual Annuity (EAA) method

Answer

The EAA converts each project's NPV into an annual equivalent cash flow, enabling fair comparison across different time horizons.

Question 4

Salvage value is most relevant in capital budgeting because it represents:

Accepted Answer

A terminal cash inflow received when the asset is disposed of at project end

Answer

Salvage value is the estimated proceeds from selling or disposing of the asset at the end of the project, representing a positive terminal cash flow.

Question 5

Beta coefficient in capital budgeting is primarily used to measure an asset's:

Accepted Answer

Systematic (market) risk relative to the overall market

Answer

Beta measures how sensitive an asset's returns are to market-wide movements, capturing systematic risk that cannot be eliminated through diversification.

(CBS) Certified Budget Specialist Practice Test

(CBS) Certified Budget Specialist Practice Test

CBS CBS Capital Budgeting & Asset Management 2