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

The payback period measures how quickly an investment recovers its cost, though it ignores cash flows beyond that point and the time value of money.

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

An NPV of zero indicates the project generates returns precisely equal to the hurdle rate, meaning investors receive their required return but no surplus value is created.

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

NPV is preferred because it directly measures value creation in dollar terms and avoids the multiple-IRR problem that can arise with non-conventional cash flows.

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 hurdle rate, often the weighted average cost of capital (WACC), is the benchmark return a project must exceed to be considered value-creating.

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

Sunk costs have already been incurred and cannot be changed by any future decision, so including them would distort the true incremental analysis of a new investment.

(CIA) Certified Industrial Accountant Practice Test

(CIA) Certified Industrial Accountant Practice Test

CIA CIA Capital Investment & Decision Making