Capital Budgeting Chapter Exam

Exam Instructions:

Choose your answers to the questions and click 'Next' to see the next set of questions. You can skip questions if you would like and come back to them later with the yellow "Go To First Skipped Question" button. When you have completed the practice exam, a green submit button will appear. Click it to see your results. Good luck!

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Question 1 1. What is a capital project?

Question 2 2. What is a capital expense?

Question 3 3. What is capital budgeting?

Question 4 4. If we can make an investment of $20,000 that gives us $25,000 in future cash flow, then what is the investment's profitability index?

Question 5 5. How do you calculate the profitability index?

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Question 6 6. Why is payback period NOT the best capital budgeting technique?

Question 7 7.

Given the following cash flows:

Initial investment at Time 0: $400,000

Net cash inflows: Time 1: $20,000; Time 2: $70,000; Time 3: $110,000; Time 4: $200,000; Time 5: $400,000.

(Please note that Time 0 is the start of year 1 and Time n is the end of Year n - for example Time 5 is the end of year 5.)

What is the Payback period?

Question 8 8. What three factors should be taken into account when making capital budgeting decisions?

Question 9 9. What is the ideal length of time for cash payback?

Question 10 10. What is the cash payback period?

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Question 11 11. Jane is the owner of an antique store. She currently rents the building out of which she runs her business. Jane learns that her landlord is selling the building and giving her the first opportunity to purchase it. Jane is interested in the offer but wants to be certain that she is making a good investment. After calculating the profitability index, Jane comes up with the number two. Based on this number, should Jane purchase the building? Why or why not?

Question 12 12. What is the cash payback technique?

Question 13 13. Larry is the owner of a men's clothing store and is interested in expanding his inventory to include shoes. After calculating the profitability index, Larry concludes that at best, he will break even if he adds shoes to his inventory. Which of the following BEST describes why Larry came to this conclusion?

Question 14 14. If you're making an investment, why is it important to understand the present value of future cash flows?

Question 15 15. Which one is NOT a technique used to make a capital budgeting decision?

Capital Budgeting Chapter Exam Instructions

Choose your answers to the questions and click 'Next' to see the next set of questions. You can skip questions if you would like and come back to them later with the yellow "Go To First Skipped Question" button. When you have completed the practice exam, a green submit button will appear. Click it to see your results. Good luck!

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