Certified Management Accountant Investment Decisions

Question 1

Which capital budgeting method calculates the time required to recover the initial investment?

Accepted Answer

Payback Period

Answer

Net Present Value

Answer

Internal Rate of Return

Answer

Profitability Index

Question 2

A project has an initial cost of $100,000 and generates $25,000 per year in cash inflows. What is its payback period?

Accepted Answer

4 years

Answer

2 years

Answer

3 years

Answer

5 years

Question 3

Which capital budgeting technique explicitly incorporates the time value of money?

Accepted Answer

Net Present Value

Answer

Payback Period

Answer

Accounting Rate of Return

Answer

Simple Rate of Return

Question 4

A project's net present value (NPV) is positive. This indicates the project:

Accepted Answer

Creates value above the required rate of return

Answer

Has an IRR equal to the cost of capital

Answer

Destroys shareholder value

Answer

Has a payback period exceeding project life

Question 5

Which of the following is a key limitation of the payback period method?

Accepted Answer

It ignores cash flows occurring after the payback period

Answer

It is difficult to calculate

Answer

It requires a discount rate

Answer

It cannot be applied to mutually exclusive projects

Question 6

The profitability index (PI) is calculated as:

Accepted Answer

Present value of future cash flows divided by initial investment

Answer

Net cash flows divided by initial investment

Answer

Initial investment divided by average annual cash flow

Answer

IRR divided by cost of capital