D362 Corporate Finance - Set 2 - Part 1

Test your knowledge of technical writing concepts with these practice questions. Each question includes detailed explanations to help you understand the correct answers.

Question 1: A project’s payback period is the amount of time required for:

Total cash flows to match the initial investment.

The project to generate profits.

The IRR to equal the WACC.

Depreciation to equal net income.

Question 2: What is the key advantage of using the Net Present Value (NPV) method?

It is easy to understand and apply.

It adjusts for time value of money.

It always guarantees a positive return.

It disregards project risk.

Question 3: The internal rate of return (IRR) is best defined as the:

Required rate of return for a project to be acceptable.

Discount rate that makes NPV equal to zero.

Profitability index for a project.

Rate at which future cash flows exceed initial costs.

Question 4: Which of the following is most likely to be true if a project’s IRR is less than its required rate of return?

The NPV is negative.

The project has a high profitability index.

The payback period is shorter than the project’s life.

The project will generate excess returns.

Question 5: The discounted payback period differs from the regular payback period because:

It does not consider project risk.

It includes the time value of money.

It ignores all cash flows after the payback point.

It uses accounting profits instead of cash flows.

Question 6: A project’s incremental cash flows are best described as:

The total cash flows of the company after the project is implemented.

The additional cash flows generated by the project.

The cash flows required to finance the project.

The cash flows generated by other projects.

Question 7: Which of the following best describes the profitability index?

The difference between total revenues and total costs.

The ratio of net present value to initial investment.

The present value of the project’s cash flows.

The return on investment after taxes.

Question 8: Which project evaluation method is most suitable for comparing projects with different lifespans?

Payback period.

NPV.

Equivalent annual cost.

Discounted payback.

Question 9: In capital budgeting, what is a sunk cost?

A cost that is recovered through the project’s cash flows.

A cost that has already been incurred and cannot be recovered.

A cost that will be incurred if the project is accepted.

A cost that changes with the level of output.

Question 10: Which one of the following is most important when considering mutually exclusive projects?

The project with the higher IRR should always be chosen.

The project with the shortest payback period is best.

The project with the highest NPV should be chosen.

The project with the least initial investment is best.

Question 11: What does it mean if the NPV of a project is zero?

The project should be rejected.

The project will generate no profit.

The project will break even in accounting terms.

The project’s cash inflows are exactly equal to its cash outflows.

Question 12: Scenario analysis is used to:

Measure the effect of changing one variable at a time.

Evaluate the different potential outcomes for a project.

Calculate the IRR of a project.

Determine the payback period.

Question 13: Sensitivity analysis is primarily used to:

Analyze a project’s cash flows over time.

Determine how changes in a single variable affect the NPV.

Simulate multiple project outcomes.

Calculate the break even point for a project.

Question 14: Which of the following cash flows should be included in the initial investment of a project?

Interest payments on debt.

Sunk costs.

The purchase of machinery.

Depreciation expenses.

Question 15: The weighted average cost of capital (WACC) is used as:

A measure of a firm’s profitability.

A discount rate in capital budgeting.

A tool for tax planning.

An estimate of project cash flows.

Question 16: What does a higher beta coefficient indicate in the context of a capital asset pricing model?

Higher risk and higher expected returns.

Lower risk and lower expected returns.

Higher risk but lower expected returns.

Lower risk and higher expected returns.

Question 17: The IRR method assumes that the project’s cash inflows are reinvested at:

The WACC.

The IRR itself.

The risk free rate.

The required rate of return.

Question 18: Which of the following is an example of an opportunity cost in capital budgeting?

The cost of hiring new employees for a project.

The revenue foregone from using a warehouse for one project instead of another.

The cost of raw materials used in production.

The interest paid on project financing.

Question 19: Which one of the following is considered a major weakness of the payback period method?

It ignores the time value of money.

It is difficult to calculate.

It overestimates the project's profitability.

It takes too long to reach a decision.

Question 20: The concept of depreciation tax shield is best described as:

The reduction in taxable income due to depreciation expenses.

The elimination of taxes on depreciation expenses.

The total depreciation value of an asset.

The profit generated from the sale of a depreciated asset.

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