Capital Budgeting Quiz: Test Your Knowledge with Our Free Quiz and Flashcards

Questions and Answers

What are the key components of the NPV rule?

The key components of the NPV rule include cash flow computations, sensitivity analysis, scenario analysis, and simulation.

How is the concept of real options applied in capital budgeting?

Real options in capital budgeting refer to the consideration of alternative investment opportunities and the flexibility to adapt to changing market conditions.

What is the significance of equivalent annual cost in investment analysis?

Equivalent annual cost is significant as it allows for the comparison of investment alternatives with different lifespans and cost structures on an annual basis.

What is the duration of the midterm test?

1 hour Signup and view all the answers

How many multiple choice questions (MCQs) are there in the test?

30 Signup and view all the answers

What topics are covered in the midterm test?

Topic 1 – Topic 3, + a couple of questions on Topic 4 Signup and view all the answers

Are students allowed to attempt the test with others?

No Signup and view all the answers

What are students allowed to use during the test?

Own notes and formula sheets Signup and view all the answers

What is the formula for expected return?

Expected Return = E R t Signup and view all the answers

Define risk premium and provide the formula for calculating it.

Risk Premium = E R t − rf Signup and view all the answers

What is the significance of the Capital Asset Pricing Model (CAPM) in valuation?

CAPM helps in estimating the required rate of return for a given level of risk. Signup and view all the answers

Explain the concept of risk in the context of investments.

Risk refers to the likelihood of loss (negative return). Signup and view all the answers

What is the formula for calculating the capital gain?

Capital Gain = Pt − Pt−1 Signup and view all the answers

Study Notes

NPV Rule

The NPV rule is a decision-making criterion used in capital budgeting to evaluate investment projects.
It involves calculating the present value of expected cash inflows and outflows, and comparing the result to the initial investment.

Real Options

Real options are opportunities to make future decisions that are embedded in an investment project.
In capital budgeting, real options are used to flexibility in investment decisions, such as the option to expand, abandon, or switch projects.

Equivalent Annual Cost (EAC)

EAC is a method of evaluating and comparing the costs of mutually exclusive investment projects with different lifetimes.
It calculates the present value of costs over the project's lifetime, and then converts it into an equivalent annual cost.

Midterm Test

Test Details

The midterm test is [duration] hours long.
The test consists of [number] multiple-choice questions (MCQs).
The test covers [topics] topics.

Test Rules

Students are not allowed to attempt the test in groups.
Students are allowed to use [resources] during the test.

Expected Return

The formula for expected return is: E(R) = ∑ (Pi * Ri), where Pi is the probability of return Ri.

Risk Premium

Risk premium is the excess return required by investors for taking on additional risk.
The formula for calculating risk premium is: Risk Premium = Expected Return - Risk-Free Rate.

Capital Asset Pricing Model (CAPM)

CAPM is a model used to estimate the expected return on an investment based on its beta.
It is used to value securities and determine the cost of capital for companies.

Risk in Investments

Risk is the uncertainty of an investment's return, which can be measured by its standard deviation or beta.
Risk is a critical concept in investments, as it affects the expected return and valuation of an investment.

Capital Gain

Capital gain is the profit made from selling an investment at a price higher than its purchase price.
The formula for calculating capital gain is: Capital Gain = Selling Price - Purchase Price.