Chapter 8
Capital Budgeting
Quiz Questions
1. Which of the following is the number of years required to recover the initial
capital investment of an organization?
a. Payback period
b. Discounted payback period
c. Net present value
d. Internal rate of return
e. Modified internal rate of return
2. Which of the following is a discounted cash flow method that compares the
present value of a project’s future cash flows to its initial costs?
a. Payback period
b. Discounted payback period
c. Net present value
d. Internal rate of return
e. Modified internal rate of return
3. As facility projects can often lead to non-normal cash flows, it is recommended
that which of the following be used when developing a capital budget?
a. Payback period
b. Discounted payback period
c. Net present value
d. Internal rate of return
e. Modified internal rate of return
4. Which of the following is the discount rate that makes the present value of the
estimated cash flows equal to the initial cost of the investment?
a. Payback period
b. Discounted payback period
c. Net present value
d. Internal rate of return
e. Modified internal rate of return
5. Using this method of capital budgeting, expected cash flows are discounted by
the project’s initial cost of capital to determine when the project will break even.
a. Payback period
b. Discounted payback period
c. Net present value
d. Internal rate of return
e. Modified internal rate of return
6. Of the following capital budgeting methods, which one ignores the time value of
money as it fails to take into account the cost of capital?
a. Payback period
b. Discounted payback period
c. Net present value
d. Internal rate of return
e. Modified internal rate of return
7. Which capital budgeting method is preferred by most managers as it analyzes
cash flows rather than net earnings?
a. Payback period
b. Discounted payback period
c. Net present value
d. Internal rate of return
e. Modified internal rate of return
8. Which of the following is the final step in the capital budgeting process?
a. Conduct a post-audit analysis
b. Select the capital budgeting method
c. Determine the incremental cash flow of a project
d. Determine the initial cost of the project
e. None of the above
9. The required rate of return to justify an investment in a capital project is the
__________.
a. Interest rate
b. Financing rate
c. Coupon rate
d. Discount rate
e. None of the above
10. The initial cost of a capital project is the actual cost of starting the project
adjusted for which of the following?
a. Any installation, delivery or packaging costs
b. Discounts to the initial price
c. The sale of existing equipment or machinery
d. Taxes
e. All of the above
True/False
1. T or F Typically, several different sources of debt and/or equity financing will be
used to fund a capital project.
2. T or F A capital budget is not helpful in evaluating alternative capital
expenditures.
3. T or F In the process of capital budgeting, the incremental cash flow of the
project is determined before the initial cost of the project.
4. T or F For any project to be accepted in a capital budget, the project’s payback
period must be less than the maximum acceptable payback period set by
the organization.
5. T or F The discounted payback period method factors time value of money
concepts into the calculation.
6. T or F If a project has a positive NPV, it will generate cash above its debt service.
7. T or F The internal rate of return is a measure of a project’s probability of
profitability.
8. T or F IRR is incredibly useful for a project with non-normal cash flows since
only one IRR can exist.
9. T or F MIRR is the discount rate where the present value of the project’s costs is
to equal the present value of the project’s terminal value.
10. T or F Successful organizations do not place emphasis on post-audits.
Answers to Quiz Questions
Multiple Choice
True/False