CTP Long-Term Capital Investments 5

Question 1

When evaluating an international capital investment, the treasury professional must account for an additional risk factor known as:

Accepted Answer

Country risk premium

Answer

International projects require a country risk premium added to the discount rate to reflect political, regulatory, and sovereign risks.

Question 2

The weighted average cost of capital (WACC) used as a discount rate implicitly assumes that the project:

Accepted Answer

Has the same risk as the firm's existing asset portfolio

Answer

Using the firm's WACC is only appropriate when the project has similar risk and capital structure characteristics as the firm's existing operations.

Question 3

Monte Carlo simulation in capital budgeting generates:

Accepted Answer

A probability distribution of NPV outcomes across thousands of scenarios

Answer

Monte Carlo simulation randomly samples input variable distributions thousands of times to build a probability distribution of possible NPV outcomes.

Question 4

A firm sells an old machine for $80,000. The machine has a book value of $50,000 and the tax rate is 25%. What is the after-tax salvage value?

Accepted Answer

$72,500

Answer

Tax on gain = ($80,000 − $50,000) × 25% = $7,500; after-tax salvage = $80,000 − $7,500 = $72,500.

Question 5

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

Accepted Answer

It ignores the time value of money and cash flows beyond the payback period

Answer

The payback period ignores both the time value of money and all cash flows occurring after the payback cutoff date, potentially favoring inferior projects.

Certified Treasury Professional Exam Practice Test

Certified Treasury Professional Exam Practice Test

CTP Long-Term Capital Investments 5