D362 Corporate Finance - Set 3 - 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: Which of the following is an advantage of the payback period method?

It accounts for the time value of money.

It provides information on liquidity.

It evaluates all cash flows of the project.

It is useful for long-term projects.

Question 2: The IRR method assumes that cash flows are reinvested at:

The cost of capital.

The IRR.

The risk-free rate.

The required return.

Question 3: Which of the following statements is true about NPV?

NPV disregards the cost of capital.

NPV always leads to acceptance of long-term projects.

NPV measures the difference between the project’s cash inflows and outflows in present value terms.

NPV is calculated without considering project risks.

Question 4: What is the primary difference between IRR and NPV methods?

IRR considers all cash flows, while NPV only considers positive ones.

NPV uses the discount rate, while IRR finds the rate at which NPV equals zero.

NPV ignores the cost of capital, while IRR incorporates it.

IRR is more accurate for projects with unequal cash flows.

Question 5: The profitability index is defined as:

The ratio of present value of cash inflows to initial investment.

The return on investment over the project’s life.

The payback period of a project.

The difference between IRR and WACC.

Question 6: Which of the following projects should be rejected based on its IRR?

A project with an IRR higher than the cost of capital.

A project with an IRR equal to the required rate of return.

A project with an IRR lower than the cost of capital.

A project with an IRR equal to zero.

Question 7: Sensitivity analysis involves:

Changing multiple variables simultaneously to determine their impact on the project.

Altering one key variable at a time to assess its impact on project NPV.

Evaluating all variables as constants throughout the project.

Calculating the NPV for various time periods of the project.

Question 8: In the context of capital budgeting, a contingent project refers to:

A project whose acceptance depends on another project.

A project that is mutually exclusive with another.

A project that requires a minimum payback period.

A project with only variable costs.

Question 9: The best decision criterion for mutually exclusive projects is:

Profitability index.

Net present value.

Internal rate of return.

Payback period.

Question 10: Which of the following is true for independent projects with conventional cash flows?

If NPV is positive, IRR must be lower than the cost of capital.

If NPV is positive, the project should be accepted.

If IRR is greater than the cost of capital, the project should be rejected.

If NPV is negative, the project will always have a positive payback period.

Question 11: In scenario analysis, the worst-case scenario refers to:

The most optimistic outcome for the project.

The situation with the lowest expected cash inflows and highest costs.

The case where the project NPV is zero.

The scenario with the fastest payback period.

Question 12: Which of the following methods focuses on cash flows rather than accounting income?

Payback period.

Discounted payback period.

Net present value.

Average accounting return.

Question 13: The profitability index method can be misleading when:

Comparing independent projects.

Evaluating mutually exclusive projects.

Projects have conventional cash flows.

The required rate of return is higher than the IRR.

Question 14: If a project has multiple IRRs, it indicates:

The project has no cash flows.

The project’s NPV is always positive.

The project has unconventional cash flows.

The project’s profitability index is negative.

Question 15: Which of the following methods provides the most accurate reflection of a project’s profitability?

Internal rate of return.

Payback period.

Net present value.

Discounted payback period.

Question 16: The purpose of capital budgeting is to:

Determine the company’s cash flow needs.

Evaluate investment projects to maximize shareholder wealth.

Assess a project’s long-term financing needs.

Minimize the company’s debt.

Question 17: What is the role of depreciation in capital budgeting decisions?

It reduces taxable income, thereby providing a tax shield.

It represents cash inflows from the project.

It is excluded from operating cash flows.

It increases the project’s NPV.

Question 18: Which of the following correctly defines a sunk cost?

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

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

A future cost that varies depending on the project’s success.

A fixed cost associated with project financing.

Question 19: The discounted payback period is the length of time until:

A project pays back its initial investment in nominal terms.

The present value of cash inflows equals the initial investment.

The project reaches its profitability index threshold.

The project’s NPV becomes positive.

Question 20: If a project’s NPV is negative, the project’s profitability index must be:

Less than 1.

Equal to 1.

Greater than 1.

Negative.

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