MCQ UNIT-2
1.Capital Budgeting is a part of:
(a) Investment Decision,
(b) Working Capital Management,
(c) Marketing Management,
(d) Capital Structure.
2. Capital Budgeting deals with:
(a) Long-term Decisions,
(b) Short-term Decisions,
(c) Both (a) and (b),
(d) Neither (a) nor (b).
3. Which of the following is not used in Capital Budgeting?
(a) Time Value of Money,
(b) Sensitivity Analysis,
(c) Net Assets Method,
(d) Cash Flows.
4. Capital Budgeting Decisions are:
(a) Reversible,
(b) Irreversible,
(c) Unimportant,
(d) All of the above.
5. Which of the following is not incorporated in Capital Budgeting?
(a) Tax-Effect,
(b) Time Value of Money,
(c) Required Rate of Return,
(d) Rate of Cash Discount.
6.. Which of the following is not a capital budgeting decision?
(a) Expansion Programme,
(b) Merger,
(c) Replacement of an Asset,
(d) Inventory Level.
7. A sound Capital Budgeting technique is based on:
(a) Cash Flows,
(b) Accounting Profit,
(c) Interest Rate on Borrowings,
(d) Last Dividend Paid.
8. Which of the following is not a relevant cost in Capital Budgeting?
(a) Sunk Cost, (
b) Opportunity Cost,
(c) Allocated Overheads,
(d) Both (a) and (c) above.
9. Capital Budgeting Decisions are based on:
(a) Incremental Profit,
(b) Incremental Cash Flows,
(c) Incremental Assets,
(d) Incremental Capital.
10. Which of the following does not effect cash flows proposal?
(a) Salvage Value,
(b) Depreciation Amount,
(c) Tax Rate Change,
(d) Method of Project Financing.
11. Cash Inflows from a project include:(
(a) Tax Shield of Depreciation,
(b) After-tax Operating Profits,
(c) Raising of Funds,
(d) Both (a) and (b).
12. Which of the following is not true with reference capital budgeting?
(a) Capital budgeting is related to asset replacement decisions,
(b) Cost of capital is equal to minimum required return,
c) Existing investment in a project is not treated as sunk cost,
(d) Timing of cash flows is relevant.
13. Which of the following is not followed in capital budgeting?
(a) Cash flows Principle,
(b) Interest Exclusion Principle,
(c) Accrual Principle,
(d) Post-tax Principle.
14. Depreciation is incorporated in cash flows because it:
(a) Is unavoidable cost,
(b) Is a cash flow,
(c) Reduces Tax liability,
(d) Involves an outflow.
15. Which of the following is not true for capital budgeting?
(a) Sunk costs are ignored,
(b) Opportunity costs are excluded,
(c) Incremental cash flows are considered,
(d) Relevant cash flows are considered.
16. Which of the following is not applied in capital budgeting?
(a) Cash flows be calculated in incremental terms,
(b) All costs and benefits are measured on cash basis,
(c) All accrued costs and revenues be incorporated,
(d) All benefits are measured on after-tax basis.
17. Evaluation of Capital Budgeting Proposals is based on Cash Flows because:
(a) Cash Flows are easy to calculate,
(b) Cash Flows are suggested by SEBI,
(c) Cash is more important than profit,
(d) None of the above.
18. Which of the following is not included in incremental A flows?
(a) Opportunity Costs,
(b) Sunk Costs,
(c) Change in Working Capital,
(d) Inflation effect.
19. A proposal is not a Capital Budgeting proposal if it:
(a) is related to Fixed Assets,
(b) brings long-term benefits,
(c) brings short-term benefits only,
(d) has very large investment.
20. In Capital Budgeting, Sunk cost is excluded because it is:
(a) of small amount,
(b) not incremental,
(c) not reversible,
(d) All of the above.
21. Savings in respect of a cost is treated in capital budgeting as:
(a) An Inflow,
(b) An Outflow,
(c) Nil,
(d) None of the above.
22. In capital budgeting, the term Capital Rationing implies:
(a) That no retained earnings available,
(b) That limited funds are available for investment,
(c) That no external funds can be raised,
(d) That no fresh investment is required in current year
23. Feasibility Set Approach to Capital Rationing can be applied in:
(a) Accept-Reject Situations,
(b) Divisible Projects,
(c) Mutually Exclusive Projects,
(d) None of the above
24. In case of divisible projects, which of the following can be used to attain maximum
NPV?
(a) Feasibility Set Approach,
(b) Internal Rate of Return,
(c) Profitability Index Approach,
(d) Any of the above
25. In case of the indivisible projects, which of the following may not give the optimum
result?
(a) Internal Rate of Return,
(b) Profitability Index,
(c) Feasibility Set Approach,
(d) All of the above
26. Profitability Index, when applied to Divisible Projects, impliedly assumes that:
(a) Project cannot be taken in parts, (
b) NPV is linearly proportionate to part of the project taken up,
(c) NPV is additive in nature,
(d) Both (b) and (c)
27. If there is no inflation during a period, then the Money Cashflow would be equal to:
(a) Present Value,
(b) Real Cashflow,
(c) Real Cashflow + Present Value ,
(d) Real Cashflow - Present Value
28. The Real Cashflows must be discounted to get the present value at a rate equal to:
(a) Money Discount Rate,
(b) Inflation Rate,
(c) Real Discount Rate,
(d) Risk free rate of interest
29. Two mutually exclusive projects with different economic lives can be compared on
the basis of
(a) Internal Rate of Return,
(b) Profitability Index,
(c) Net Present Value,
(d) Equivalent Annuity Value
30. Risk in Capital budgeting implies that the decision-maker knows___________of the
cash flows.
(a) Variability,
(b) Probability,
(c) Certainty,
(d) None of the above
31. In Certainty-equivalent approach, adjusted cash flows are discounted at:
(a) Accounting Rate of Return,
(b) Internal Rate of Return,
(c) Hurdle Rate,
(d) Risk-free Rate
32. Risk in Capital budgeting is same as:
(a) Uncertainty of Cash flows,
(b) Probability of Cash flows,
(c) Certainty of Cash flows,
(d) Variability of Cash flows
33. Which of the following is a risk factor in capital budgeting?
(a) Industry specific risk factors,
b) Competition risk factors,
(c) Project specific risk factors,
(d) All of the above
34. In Risk-Adjusted Discount Rate method, the normal rate of discount is:
(a) Increased,
(b) Decreased,
(c) Unchanged,
(d) None of the above
35. In Risk-Adjusted Discount Rate method, which one is adjusted?
(a) Cash flows,
(b) Life of the proposal,
(c) Rate of discount,
(d) Salvage value
36. NPV of a proposal, as calculated by RADR real CE Approach will be:
(a) Same,
(b) Unequal,
(c) Both (a) and (b),
(d) None of (a) and (b)
37. Risk of a Capital budgeting can be incorporated
(a) Adjusting the Cash flows,
(b) Adjusting the Discount Rate,
(c) Adjusting the life,
(d) All of the above
38.. Which element of the basic NPV equation is adjusted by the RADR?
(a) Denominator,
(b) Numerator,
(c) Both,
(d) None
39. In Certainty Equivalent Approach, the CE Factors for different years are:
(a) Generally increasing,
(b) Generally decreasing,
(c) Generally same,
(d) None of the above
40. Which of the following is correct for RADR?
(a) Accept a project if NPV at RADR is negative,
(b) Accept a project if IRR is more than RADR
(c) RADR is overall cost of capital plus risk-premium ,
(d) All of the above.
41. In Payback Period approach to risk the target payback period is
(a) Not adjusted,
(b) Adjusted upward,
(c) Adjusted downward ,
(d) (b) or (c)
42.Which of the following does not effect cash flows proposal?
(a) Salvage Value
(b) Depreciation Amount
(c) Tax Rate Change
(d) Method of Project Financing
43 Cash Inflows from a project include:
(a) Tax Shield of Depreciation
(b) After-tax Operating Profits
(c) Raising of Funds
(d) Both (a) and (b)
44. Which of the following is not true with reference capital budgeting?
(a) Capital budgeting is related to asset replacement decisions,
(b) Cost of capital is equal to minimum required return,
(c) Existing investment in a project is not treated as sunk cost,
(d) Timing of cash flows is relevant.
45. Which of the following is not followed in capital budgeting?
(a) Cash flows Principle
(b) Interest Exclusion Principle
(c) Accrual Principle
(d) Post-tax Principle
46. Depreciation is incorporated in cash flows because it:
(a) Is unavoidable cost
(b) Is a cash flow
(c) Reduces Tax liability
(d) Involves an outflow
47.. Evaluation of Capital Budgeting Proposals is based on Cash Flows because:
(a) Cash Flows are easy to calculate
(b)Cash Flows are suggested by SEBI
(c) Cash is more important than profit
(d) None of the above
48. Which of the following is not included in incremental A flows?
a) Opportunity Costs
(b)Sunk Costs
(c) Change in Working Capital
(d) Inflation effect
49. A proposal is not a Capital Budgeting proposal if it:
(a) is related to Fixed Assets
b) brings long-term benefits
c) brings short-term benefits only
(d) has very large investment.
50. In Capital Budgeting, Sunk cost is excluded because it is:
(a) of small amount
(b) not incremental
(c) not reversible
(d) All of the above
51.. Savings in respect of a cost is treated in capital budgeting as:
(a) An Inflow
(b) An Outflow
(c) Down flow
(d) None of the above.
52. In capital budgeting, the term Capital Rationing implies:
(a) That no retained earnings available
(b) That limited funds are available for investment
(c) That no external funds can be raised,
(d) That no fresh investment is required in current year
53.The method which does not consider investment profitability is
( a) Pay back
(b) ARR
(c) NPV
(d) IRR
54. Capital Budgeting decisions involve huge amount of risk due to
(a) Time factor
( b) Money factor
(c) Human factor
(d) Natural factor
55.The criteria for acceptance of a project on the basis of Profitability Index (PI) is
(a).PI=0
(b) PI > 0
(c ) PI < 0
(d ) PI > 1
56.Net Present Value of a machine is
(a) PV of cash inflows less cost of investment
(b) PV of cash inflows ÷ cost of investment
(c ) PV of net profit after tax less cost of investment
(d ) PV of cash inflows less average cost of investment
57.What is the net present value?
(a) the future value of a project’s cash flows plus its initial cost
(b) the present value of a project’s cash flows plus its initial cost
( c ) the future value of a project’s cash flows minus its initial cost
(d) the present value of a project’s cash flows minus its initial co
58.Why are projects with negative net present values (NPVs) unacceptable to a firm?
(a) Returns lower than the cost of capital result in firm failure.
(b) Returns with negative NPVs cause an equal profit ratio.
(c) Returns with negative NPVs are acceptable to a firm.
(d )Returns lower than the cost of capital result in higher profit ratios
59. Each of the following techniques use discounted cash flows to incorporate the time
value
of money into their analysis except
(a ) net present value (NPV)
(b) payback method
(c ) internal rate of return (IRR)
(d ) modified internal rate of return
60. A manager can presume that the project will enhance shareholder wealth only if its
NPV based on the risk adjusted rate is
( a ) positive.
(b) negative.
(c) zero.
(d) equal.
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Key Unit-2
1 c 13 c 25 c 37 b 49 c
2 a 14 c 26 a 38 a 50 b
3 c 15 b 27 b 39 b 51 a
4 b 16 c 28 c 40 c 52 b
5 d 17 c 29 d 41 c 53 a
6 b 18 b 30 d 42 d 54 a
7 a 19 c 31 d 43 d 55 d
8 d 20 b 32 d 44 c 56 a
9 b 21 a 33 d 45 c 57 d
10 d 22 b 34 d 46 c 58 a
11 d 23 a 35 c 47 c 59 b
12 c 24 c 36 d 48 d 60 a
