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
Which capital budgeting technique calculates the time required for cumulative project cash inflows to equal the initial investment?
Answer: Payback Period
The Payback Period measures how long it takes for a project's cumulative cash inflows to recover the initial investment cost.
Net Present Value (NPV) is considered positive and acceptable when:
Answer: NPV is greater than zero
A positive NPV means the project generates more value than its cost of capital, making it financially worthwhile to pursue.
The Internal Rate of Return (IRR) is best defined as:
Answer: The discount rate at which NPV equals zero
IRR is the discount rate that makes the NPV of all cash flows from a project equal to zero.
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?
Answer: Project A because PI > 1 indicates value creation
A PI greater than 1.0 means the project creates more value than it costs, so Project A with PI of 1.3 is acceptable while Project B at 0.9 is not.
Which of the following is a limitation of the Payback Period method?
Answer: It ignores the time value of money
The traditional Payback Period does not discount future cash flows, so it ignores the time value of money.
When two mutually exclusive projects both have positive NPVs but different IRRs, which method should be used to make the final decision?
Answer: Choose the project with the higher NPV
NPV is the preferred decision criterion for mutually exclusive projects because it directly measures the value added to the firm.