Finance for Non-Finance Managers Investment Decision Making 3

Question 1

What is the weighted average cost of capital (WACC)?

Accepted Answer

The blended cost of all sources of capital, weighted by their proportion

Answer

WACC is the average rate a company must earn on its assets to satisfy all capital providers, weighted by the mix of debt and equity.

Question 2

Which of the following is a qualitative factor in investment decisions?

Accepted Answer

Impact on employee morale and company reputation

Answer

Qualitative factors like employee morale or brand reputation cannot be easily quantified but can significantly affect a project's success.

Question 3

Mutually exclusive projects are projects where:

Accepted Answer

Choosing one project means the other cannot also be chosen

Answer

Mutually exclusive projects compete with each other, so accepting one automatically excludes the others.

Question 4

A profitability index (PI) greater than 1.0 indicates:

Accepted Answer

The project creates value and should be considered

Answer

A PI > 1.0 means the present value of future cash flows exceeds the initial investment, indicating value creation.

Question 5

Why is sensitivity analysis important in investment appraisal?

Accepted Answer

It shows how the project's viability changes when assumptions vary

Answer

Sensitivity analysis reveals which variables have the most impact on a project's NPV, helping managers focus risk mitigation efforts.

Finance for Non-Finance Managers Practice Test