CIA CIA Capital Investment & Decision Making

Question 1

Which capital budgeting method calculates the time required for an investment's cash inflows to recover the initial outlay?

Accepted Answer

Payback period

Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Profitability Index

Question 2

A project has an NPV of $0. This means the project:

Accepted Answer

Earns exactly the required rate of return, neither creating nor destroying value

Answer

Should be rejected because it generates no profit

Answer

Will generate cash flows equal to the initial investment only

Answer

Has an IRR lower than the cost of capital

Question 3

When comparing two mutually exclusive projects, which capital budgeting method is generally preferred for decision-making?

Accepted Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Payback Period

Answer

Accounting Rate of Return

Question 4

The 'hurdle rate' used in capital investment decisions represents:

Accepted Answer

The minimum acceptable rate of return required to justify the investment

Answer

The maximum interest rate available on bank loans

Answer

The historical average return of similar projects in the industry

Answer

The tax rate applied to capital gains from the investment

Question 5

In capital investment analysis, 'sunk costs' should be:

Accepted Answer

Excluded from the analysis because they are irreversible and cannot be recovered

Answer

Included as a key factor in the investment decision

Answer

Depreciated over the life of the new project

Answer

Offset against future revenues in the NPV calculation

Question 6

Which term describes the additional revenue or cost that arises from choosing one investment option over another?

Accepted Answer

Incremental (differential) cash flow

Answer

Sunk cost

Answer

Opportunity cost

Answer

Terminal cash flow