Question 1

When calculating the benefit- cost ratio, which ratio would you use (using the definitions in Arnold 's textbook) ?

Accepted Answer

A)   Net present value/Initial outlay
B)   Initial outlay/Net initial value
C)   Initial outlay/Net present value
D)   Net initial value/Present outlayE) A) and B)
F) All of the above

Question 2

A firm with limited funds for investment in capital assets must ration those funds by allocating them to projects that will maximize share value.

Accepted Answer

A) True 
 B)False  True

Question 3

Which two of the following are possible approaches to adjusting for inflation in project appraisal?

Accepted Answer

A)   Estimate the cash flow in money terms and use a real discount rate
B)   Estimate the cash flow in real terms and use a real discount rate
C)   Estimate the cash flow in real terms and use a money discount rate
D)   Estimate the cash flow in money terms and use a money discount rateE) B) and D)
F) All of the above

Question 4

Which three of the following accurately describe a post- completion audit?

Accepted Answer

A)   It is the monitoring and evaluation of the progress of a capital investment project.
B)   It focuses primarily on the differences between predicted and actual profits.
C)   It involves analysis of cash flows and other costs and benefits that were forecast at the time of authorization.
D)   It involves analysis of actual cash flows and other costs and benefits.E) All of the above
F) A) and B)

Question 5

The objective of is to select the group of projects that provides the highest overall net present value and does not require more dollars than are budgeted.

Accepted Answer

A)   certainty equivalents
B)   capital rationing
C)   sensitivity analysis
D)   scenario analysisE) B) and C)
F) A) and D)

Question 6

Which of the following is a key rule for analysing indivisible one- period capital rationing problems?

Accepted Answer

A)   Examine all the feasible alternative combinations
B)   Make tax reduction a primary aim
C)   Focus on initial outlay
D)   Focus on maintaining present valueE) C) and D)
F) B) and C)

Question 7

Which of the following best describes capital rationing?

Accepted Answer

A)   When the financial markets are told by government not to lend beyond imposed limits
B)   When wealth is destroyed because capital repayments on loans have to be made earlier than anticipated
C)   When funds are not available to undertake all the projects put forward by divisional management teams
D)   When funds are not available to finance all wealth- enhancing projectsE) B) and C)
F) A) and D)

Question 8

Which option best describes the calculation of money cash flows?

Accepted Answer

A)   Future cash flows are expressed in the prices expected to rule when the cash flow occurs.
B)   All present cash flows are expressed in the prices expected to rule when the cash flow occurs.
C)   Future cash flows are expressed in constant purchasing power.
D)   Present cash flows are expressed in constant purchasing power.E) A) and B)
F) A) and C)

Question 9

The objective of capital rationing is to select the group of projects that provides the highest overall net present value and does not require more euros than are budgeted.

Accepted Answer

A) True 
 B)False  True

Question 10

How is benefit- cost ratio calculated?

Accepted Answer

A)   Net present value divided by Total outlay
B)   Net present value divided by Initial outlay
C)   Gross present value divided by Total outlay
D)   Gross present value divided by Initial outlayE) None of the above
F) B) and C)

Question 11

Management may impose internal limits on investment expenditure despite the availability of positive NPV projects. What term is used for these limits?

Accepted Answer

A)   Soft capital rationing
B)   Divisible one- period rationing
C)   Indivisible one- period rationing
D)   Hard capital rationingE) A) and B)
F) C) and D)

Question 12

If a firm is subject to capital rationing, it is able to accept all independent projects that provide an acceptable return.

Accepted Answer

A) True 
 B)False  False

Question 13

In which type of cash flow are all future cash flows expressed in the prices expected to rule when the cash flow occurs?

Accepted Answer

A)   Inflation- linked cash flow
B)   Money cash flow
C)   Real cash flow
D)   Money rate of cash flowE) All of the above
F) A) and B)

Question 14

If a firm has unlimited funds to invest in capital assets, all independent projects that meet its minimum investment criteria should be implemented.

Accepted Answer

A) True 
 B)False

Question 15

Which option correctly show Fisher's equation?

Accepted Answer

A)   (1+m)  = (1+h)  x (1+ i) 
B)   (1+m)  x (1+h)  = (1+ i) 
C)   (1+h)  = (1+i)  x (1+ m) 
D)   (1+h)  = (1+i)  x (1- m) E) None of the above
F) C) and D)

Question 16

The ranking approach involves the ranking of capital expenditure projects on the basis of some predetermined measure such as the profitability index or rate of return.

Accepted Answer

A) True 
 B)False

Question 17

Which approach should be taken to adjust for inflation when calculating net present value?

Accepted Answer

A)   Estimate the future cash flows by multiplying by the specific inflation of each cash inflow and outflow item, and then discount using the real rate of return
B)   Estimate the cash flows in money terms and use a real discount rate
C)   Estimate the cash flows in real terms and use a real discount rate
D)   Estimate the cash flows in real terms and use a money discount rateE) A) and D)
F) A) and C)

Question 18

Which three of the following factors appear in Fisher's equation?

Accepted Answer

A)   Internal rate of return
B)   Anticipated rate of inflation
C)   Real rate of return
D)   Money rate of returnE) None of the above
F) B) and D)

Question 19

If a firm has a limited capital budget and too many good capital projects to fund them all, it is said to be facing the problem of

Accepted Answer

A)   profitability.
B)   wealth optimization.
C)   capital rationing.
D)   constrained capital.E) A) and C)
F) B) and C)

Question 20

The objective of capital rationing is to select the group of projects that provides the quickest overall payback and does not require more euros than are budgeted.

Accepted Answer

A) True 
 B)False

Exam 5: Project Appraisal: Capital Rationing, Taxation and Inflation

When calculating the benefit- cost ratio, which ratio would you use (using the definitions in Arnold 's textbook) ?

Correct AnswerverifiedShow Answer

A firm with limited funds for investment in capital assets must ration those funds by allocating them to projects that will maximize share value.

Correct AnswerverifiedTrue

Which two of the following are possible approaches to adjusting for inflation in project appraisal?

Correct AnswerverifiedShow Answer

Which three of the following accurately describe a post- completion audit?

Correct AnswerverifiedShow Answer

The objective of is to select the group of projects that provides the highest overall net present value and does not require more dollars than are budgeted.

Correct AnswerverifiedShow Answer

Which of the following is a key rule for analysing indivisible one- period capital rationing problems?

Correct AnswerverifiedShow Answer

Which of the following best describes capital rationing?

Correct AnswerverifiedShow Answer

Which option best describes the calculation of money cash flows?

Correct AnswerverifiedShow Answer

The objective of capital rationing is to select the group of projects that provides the highest overall net present value and does not require more euros than are budgeted.

Correct AnswerverifiedTrue

How is benefit- cost ratio calculated?

Correct AnswerverifiedShow Answer

Management may impose internal limits on investment expenditure despite the availability of positive NPV projects. What term is used for these limits?

Correct AnswerverifiedShow Answer

If a firm is subject to capital rationing, it is able to accept all independent projects that provide an acceptable return.

Correct AnswerverifiedFalse

In which type of cash flow are all future cash flows expressed in the prices expected to rule when the cash flow occurs?

Correct AnswerverifiedShow Answer

If a firm has unlimited funds to invest in capital assets, all independent projects that meet its minimum investment criteria should be implemented.

Correct AnswerverifiedShow Answer

Which option correctly show Fisher's equation?

Correct AnswerverifiedShow Answer

The ranking approach involves the ranking of capital expenditure projects on the basis of some predetermined measure such as the profitability index or rate of return.

Correct AnswerverifiedShow Answer

Which approach should be taken to adjust for inflation when calculating net present value?

Correct AnswerverifiedShow Answer

Which three of the following factors appear in Fisher's equation?

Correct AnswerverifiedShow Answer

If a firm has a limited capital budget and too many good capital projects to fund them all, it is said to be facing the problem of

Correct AnswerverifiedShow Answer

The objective of capital rationing is to select the group of projects that provides the quickest overall payback and does not require more euros than are budgeted.

Correct AnswerverifiedShow Answer

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