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Capital Budgeting Decisions Flashcards

7 cards from real CPFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Capital Budgeting Decisions flashcards as text

  1. A project requires $50,000 today and returns $60,000 in one year. At a 10% discount rate, what is its NPV?

    Answer: $5,454

    NPV = $60,000/1.10 - $50,000 = $54,545 - $50,000 = $5,454.

  2. Which method ignores the time value of money entirely?

    Answer: Payback period

    The basic payback period sums undiscounted cash flows until the investment is recovered.

  3. When NPV and IRR rank two mutually exclusive projects differently, which method should generally prevail?

    Answer: NPV, because it measures dollar value added

    NPV directly measures wealth created and is preferred for mutually exclusive choices.

  4. A capital project has an IRR of 12% and the firm's cost of capital is 14%. The project should be:

    Answer: Rejected

    IRR below the cost of capital means the project destroys value and should be rejected.

  5. The profitability index of a project equals:

    Answer: PV of future cash flows divided by initial investment

    PI = present value of future cash flows / initial investment; a value above 1 indicates a positive NPV.

  6. Which cash flow is irrelevant in a capital budgeting decision?

    Answer: A sunk cost already incurred

    Sunk costs are unrecoverable and do not change with the decision, so they are excluded.

  7. A higher discount rate applied to a conventional project will:

    Answer: Decrease NPV

    Higher discount rates reduce the present value of future inflows, lowering NPV.