Capital Budgeting Flashcards
6 cards from real Financial Management for Project Managers practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Capital Budgeting flashcards as text
Working capital requirements for a new project should be treated in capital budgeting as:
Answer: An initial cash outflow recovered at project end
Net working capital needed at project start is a cash outflow that is typically recovered (reversed) at the end of the project's life.
Which method adjusts the NPV analysis by incorporating the probability of different scenarios to account for uncertainty?
Answer: Monte Carlo simulation
Monte Carlo simulation runs thousands of scenarios with varying inputs to produce a probability distribution of NPV outcomes, quantifying project risk.
An opportunity cost in capital budgeting represents:
Answer: The benefit foregone by choosing one investment over another
Opportunity cost is the value of the next best alternative forgone when a capital allocation decision is made.
The terminal (salvage) value in a capital budgeting analysis represents:
Answer: The after-tax proceeds from disposing of project assets at end of life
Terminal value captures the after-tax cash received from selling project assets and recovering working capital when the project ends.
Which capital budgeting scenario analysis asks: 'At what level of sales does the project break even in NPV terms?'
Answer: Break-even analysis
Break-even analysis in capital budgeting identifies the minimum level of a key variable (such as unit sales) at which NPV equals zero.
Real options in capital budgeting give project managers the right to:
Answer: Expand, delay, or abandon a project based on future information
Real options recognize that managers have flexibility to expand, defer, or abandon projects in response to changing conditions, adding value beyond static NPV.