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

Depreciation reduces taxable income, which lowers the tax liability and creates a non-cash tax shield that improves after-tax cash flows.

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

WACC represents the blended cost of all capital sources and is the standard hurdle rate used to discount project cash flows in NPV analysis.

Question 3

An incremental cash flow in capital budgeting refers to:

Accepted Answer

Cash flows that occur only if the project is undertaken

Answer

Incremental cash flows are the additional cash flows that result specifically from accepting a project, excluding sunk costs and including opportunity costs.

Question 4

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

Accepted Answer

Hurdle rate

Answer

The hurdle rate is the minimum rate of return required by management before approving a capital investment project.

Question 5

Sunk costs should be treated in capital budgeting decisions by:

Accepted Answer

Excluding them because they are irrelevant to future decisions

Answer

Sunk costs are past expenditures that cannot be recovered and therefore should not influence future capital budgeting decisions.

Financial Management for Project Managers Practice Test

Financial Management for Project Managers Practice Test

Financial Management for Project Managers Capital Budgeting 2