Financial Management for Project Managers Capital Budgeting 2

Question 1

Depreciation is relevant to capital budgeting primarily because:

Accepted Answer

It reduces taxable income, creating a tax shield

Answer

It increases a project's cash outflows

Answer

It directly increases project revenue

Answer

It is added to the initial investment

Question 2

The discount rate used in NPV analysis for a project is most commonly the:

Accepted Answer

Weighted Average Cost of Capital (WACC)

Answer

Prime lending rate

Answer

Risk-free Treasury rate

Answer

Inflation rate

Question 3

An incremental cash flow in capital budgeting refers to:

Accepted Answer

Cash flows that occur only if the project is undertaken

Answer

Total revenue generated by the project

Answer

All historical costs related to the project

Answer

The financing costs of the project

Question 4

Which capital budgeting term describes the minimum acceptable rate of return on a project investment?

Accepted Answer

Hurdle rate

Answer

Opportunity cost

Answer

Inflation rate

Answer

Residual value

Question 5

Sunk costs should be treated in capital budgeting decisions by:

Accepted Answer

Excluding them because they are irrelevant to future decisions

Answer

Including them as part of the initial investment

Answer

Subtracting them from projected cash inflows

Answer

Amortizing them over the project life

Question 6

The Modified Internal Rate of Return (MIRR) addresses which key weakness of traditional IRR?

Accepted Answer

It assumes reinvestment at the project's own IRR rather than the cost of capital

Answer

It does not account for project size

Answer

It ignores the initial investment amount

Answer

It cannot handle negative cash flows