30 Questions
What is the primary advantage of using Net Present Value (NPV) to evaluate projects?
It ranks projects based on true profitability
What is a significant weakness of using Net Present Value (NPV) for investment appraisal?
It is more difficult to use compared to traditional methods
How does Net Present Value (NPV) handle the assessment of future projects within a firm?
By assuming all projects have the same level of risk
What does Profitability Index (PI) or Benefit Cost Ratio (BCR) aim to accomplish?
Calculating and comparing benefits and costs of a project
Why is it a weakness to use a firm's cost of capital as the discount rate for all future projects according to the text?
It assumes all future projects bear the same risks as current projects
What key aspect distinguishes Net Present Value (NPV) from traditional methods of evaluating projects?
Uses cash flows and discounts them using the firm's cost of capital
What is the formula to calculate the payback period for a project with constant annual cash inflows?
$\text{PBP} = \frac{\text{Initial Investment}}{\text{annual constant cash inflows}}$
In the context of project evaluation, what does PBP stand for?
Payback Period
What assumption is made when calculating the payback period for projects with unequal cash inflows?
Cash inflows will be evenly generated
Why does the payback period method choose ventures with the shortest payback period?
To reduce uncertainty in future cash returns
What is an advantage of using the payback period method for project evaluation?
It is easy to understand and calculate
What criterion does management use to determine whether to accept future projects based on the payback period?
Projects with a shorter payback period than management's maximum acceptable PBP
What is the initial investment capital required for the new medical facility?
Ksh 20 million
What method is used for calculating depreciation?
Straight line method
What is the cost of capital for the project?
12%
Which of the following is NOT required to calculate the Net Present Value (NPV)?
Accounting rate of return
What is the total expected cash inflow over the 5-year period?
Ksh 30 million
What is the corporate tax rate given in the question?
30%
What is the primary weakness of the Accounting Rates of Return (ARR) method?
It fails to consider the time value of money
Which of the following statements about the ARR method is correct?
It is based solely on data from financial statements
If a project has an ARR of 18% and the management's minimum required ARR is 15%, what should be the decision?
Accept the project
How is the average investment calculated in the ARR method?
$\frac{\text{Initial Investment + Residual Value}}{2}$
Which of the following is a strength of the ARR method?
It uses returns from the entire life of the project
If two mutually exclusive projects have ARRs of 22% and 25%, which project should be chosen according to the ARR method?
The project with an ARR of 25%
What is the Average Rate of Return (ARR) for this project?
14%
What is the tax shield in year 2?
Sh. 1,200,000
What is the payback period for this project?
3 years 4 months
If the discount rate is 12%, what is the Net Present Value (NPV) of the project?
-Sh. 159,151
What is the present value of cash inflows (PVCIF) for this project?
Sh. 19,840,849
What is the initial investment for this project?
Sh. 20,000,000
Test your knowledge on capital budgeting techniques such as Net Present Value (NPV), Profitability Index (PI), Internal Rate of Return (IRR), and more. This quiz covers methods used to evaluate the profitability of investments and projects.
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