Financial Management for Project Managers Capital Budgeting 1

Question 1

Which capital budgeting technique calculates the time required for cumulative project cash inflows to equal the initial investment?

Accepted Answer

Payback Period

Answer

Net Present Value

Answer

Internal Rate of Return

Answer

Profitability Index

Question 2

Net Present Value (NPV) is considered positive and acceptable when:

Accepted Answer

NPV is greater than zero

Answer

NPV equals zero

Answer

NPV is less than zero

Answer

NPV equals the discount rate

Question 3

The Internal Rate of Return (IRR) is best defined as:

Accepted Answer

The discount rate at which NPV equals zero

Answer

The project's accounting profit rate

Answer

The ratio of net income to total assets

Answer

The average return over the project life

Question 4

A project manager is comparing two projects using the Profitability Index (PI). Project A has a PI of 1.3 and Project B has a PI of 0.9. Which should be selected?

Accepted Answer

Project A because PI > 1 indicates value creation

Answer

Project B because it has a lower PI

Answer

Both projects are equally viable

Answer

Neither project should be selected

Question 5

Which of the following is a limitation of the Payback Period method?

Accepted Answer

It ignores the time value of money

Answer

It is difficult to calculate

Answer

It requires knowledge of the discount rate

Answer

It cannot be applied to mutually exclusive projects

Question 6

When two mutually exclusive projects both have positive NPVs but different IRRs, which method should be used to make the final decision?

Accepted Answer

Choose the project with the higher NPV

Answer

Choose the project with the higher IRR

Answer

Choose the project with the shorter payback period

Answer

Use the Profitability Index to decide