Finance for Non-Finance Managers Capital Budgeting 4

Question 1

Sensitivity analysis in capital budgeting is used to:

Accepted Answer

Assess how changes in one variable affect project NPV

Answer

Sensitivity analysis changes one input variable at a time (e.g., sales volume, price) to see how sensitive NPV is to that assumption.

Question 2

The Equivalent Annual Annuity (EAA) method is most useful when comparing projects that:

Accepted Answer

Have different useful lives

Answer

EAA converts each project's NPV into an annual equivalent, enabling fair comparison of projects with unequal lifespans.

Question 3

In capital budgeting, depreciation matters primarily because it:

Accepted Answer

Creates a tax shield that increases after-tax cash flows

Answer

Depreciation is non-cash but reduces taxable income, generating a tax shield that improves the project's actual cash flows.

Question 4

Break-even analysis in capital budgeting identifies the level of sales at which:

Accepted Answer

The NPV equals zero

Answer

Break-even in NPV terms finds the minimum output or price needed for the project to have a zero net present value.

Question 5

Which of the following is NOT a relevant cash flow in capital budgeting analysis?

Accepted Answer

Market research study paid last year to evaluate the project

Answer

The market research study is a sunk cost — it was paid regardless of the project decision and is therefore irrelevant to the investment choice.

Finance for Non-Finance Managers Practice Test