Financial Management for Project Managers Capital Budgeting 3

Question 1

Working capital requirements for a new project should be treated in capital budgeting as:

Accepted Answer

An initial cash outflow recovered at project end

Answer

Net working capital needed at project start is a cash outflow that is typically recovered (reversed) at the end of the project's life.

Question 2

Which method adjusts the NPV analysis by incorporating the probability of different scenarios to account for uncertainty?

Accepted Answer

Monte Carlo simulation

Answer

Monte Carlo simulation runs thousands of scenarios with varying inputs to produce a probability distribution of NPV outcomes, quantifying project risk.

Question 3

An opportunity cost in capital budgeting represents:

Accepted Answer

The benefit foregone by choosing one investment over another

Answer

Opportunity cost is the value of the next best alternative forgone when a capital allocation decision is made.

Question 4

The terminal (salvage) value in a capital budgeting analysis represents:

Accepted Answer

The after-tax proceeds from disposing of project assets at end of life

Answer

Terminal value captures the after-tax cash received from selling project assets and recovering working capital when the project ends.

Question 5

Which capital budgeting scenario analysis asks: 'At what level of sales does the project break even in NPV terms?'

Accepted Answer

Break-even analysis

Answer

Break-even analysis in capital budgeting identifies the minimum level of a key variable (such as unit sales) at which NPV equals zero.

Financial Management for Project Managers Practice Test

Financial Management for Project Managers Practice Test

Financial Management for Project Managers Capital Budgeting 3