CBS Capital Budgeting & Asset Management Flashcards

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

Answer: Internal Rate of Return (IRR)

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

Incremental cash flows in capital budgeting refer to:

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

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

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

Answer: Equivalent Annual Annuity (EAA) method

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

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

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

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.

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

Answer: Systematic (market) risk relative to the overall market

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

Which of the following is NOT included as part of the initial investment outlay in a capital budgeting analysis?

Answer: Sunk costs from a prior feasibility study

Sunk costs are already spent and irrelevant to the capital budgeting decision, so they are excluded from the initial investment calculation.