Fundamentals of Financial Management mcq practice set 5

Q161. The present value of a future cash flow can be calculated using which formula?
a) PV = FV / (1 + r)^n
b) PV = FV / (1 – r)^n
c) FV = PV x (1 + r)^n
d) FV = PV x (1 – r)^n

Answer

Answer: a) PV = FV / (1 + r)^n

Q162. Which capital budgeting technique does not take into account the time value of money?
a) Payback period
b) Net present value (NPV)
c) Internal rate of return (IRR)
d) Profitability index (PI)

Answer

Answer: a) Payback period

Q163. The payback period is defined as:
a) The period required to recoup the initial investment
b) The period during which the project generates positive cash flows
c) The period required to achieve the targeted rate of return
d) The period during which the project generates negative cash flows

Answer

Answer: a) The period required to recoup the initial investment

Q164. The accounting rate of return (ARR) is calculated by dividing:
a) Net present value (NPV) by the initial investment
b) Average annual cash inflows by the initial investment
c) Initial investment by the payback period
d) Internal rate of return (IRR) by the initial investment

Answer

Answer: b) Average annual cash inflows by the initial investment

Q165. Which capital budgeting technique uses discounted cash flows to evaluate investment projects?
a) Payback period
b) Accounting rate of return (ARR)
c) Profitability index (PI)
d) Net present value (NPV)

Answer

Answer: d) Net present value (NPV)

Q166. The profitability index (PI) is calculated as:
a) Present value of cash inflows / Initial investment
b) Initial investment / Present value of cash inflows
c) Net present value (NPV) / Initial investment
d) Initial investment / Net present value (NPV)

Answer

Answer: a) Present value of cash inflows / Initial investment

Q167. The internal rate of return (IRR) is defined as:
a) The rate at which the project achieves breakeven
b) The rate at which the project generates positive cash flows
c) The discount rate that makes the net present value (NPV) zero
d) The discount rate that equals the payback period

Answer

Answer: c) The discount rate that makes the net present value (NPV) zero

Q168. Which capital budgeting technique accounts for the reinvestment of cash flows at the project’s internal rate of return?
a) Modified internal rate of return (MIRR)
b) Payback period
c) Accounting rate of return (ARR)
d) Profitability index (PI)

Answer

Answer: a) Modified internal rate of return (MIRR)

Q169. Green capital budgeting refers to:
a) The use of environmentally friendly financial instruments for funding projects
b) The allocation of capital exclusively to renewable energy projects
c) The consideration of environmental factors in investment decisions
d) The use of discounted cash flow techniques in sustainable investments

Answer

Answer: c) The consideration of environmental factors in investment decisions

Q170. Which capital budgeting technique helps in measuring the profitability of a project relative to its cost?
a) Payback period
b) Net present value (NPV)
c) Accounting rate of return (ARR)
d) Profitability index (PI)

Answer

Answer: c) Accounting rate of return (ARR)

Q171. Which capital budgeting technique calculates the time required to recover the initial investment?
a) Payback period
b) Internal rate of return (IRR)
c) Net present value (NPV)
d) Profitability index (PI)

Answer

Answer: a) Payback period

Q172. Which capital budgeting technique considers all the cash flows of a project?
a) Payback period
b) Net present value (NPV)
c) Internal rate of return (IRR)
d) Profitability index (PI)

Answer

Answer: b) Net present value (NPV)

Q173. The profitability index (PI) of a project is less than 1. What does this indicate?
a) The project is not financially viable.
b) The project has a negative net present value (NPV).
c) The project has a positive net present value (NPV).
d) The project has an internal rate of return (IRR) greater than the required rate of return.

Answer

Answer: a) The project is not financially viable.

Q174. The internal rate of return (IRR) of a project is higher than the required rate of return. What does this imply?
a) The project has a positive net present value (NPV).
b) The project has a negative net present value (NPV).
c) The project is not financially viable.
d) The project has a payback period longer than the expected time frame.

Answer

Answer: a) The project has a positive net present value (NPV).

Q175. Which capital budgeting technique helps in identifying the time required to recover the initial investment and additional profits earned thereafter?
a) Payback period
b) Profitability index (PI)
c) Net present value (NPV)
d) Internal rate of return (IRR)

Answer

Answer: a) Payback period

Q176. Capital budgeting decisions are primarily based on:
a) Historical financial data.
b) Estimations and forecasts.
c) Regulatory requirements.
d) Market demand and supply.

Answer

Answer: b) Estimations and forecasts.

Q177. Which of the following capital budgeting techniques is considered the most comprehensive and reliable?
a) Payback period
b) Accounting rate of return (ARR)
c) Net present value (NPV)
d) Profitability index (PI)

Answer

Answer: c) Net present value (NPV)

Q178. The concept of time value of money is an integral part of which capital budgeting technique?
a) Payback period
b) Accounting rate of return (ARR)
c) Net present value (NPV)
d) Profitability index (PI)

Answer

Answer: c) Net present value (NPV)

Q179. Which of the following capital budgeting techniques is based on the concept of discounted cash flows?
a) Payback period
b) Accounting rate of return (ARR)
c) Net present value (NPV)
d) Profitability index (PI)

Answer

Answer: c) Net present value (NPV)

Q180. Which of the following factors are considered in estimating cash flows for project appraisal?
a) Initial investment and payback period
b) Net present value (NPV) and internal rate of return (IRR)
c) Relevant costs and benefits over the project’s life
d) Payback period and profitability index (PI)

Answer

Answer: c) Relevant costs and benefits over the project’s life

Q181. What does the payback period measure?
a) The time it takes to recover the initial investment in a project
b) The profitability of a project relative to its cost
c) The present value of cash inflows compared to the initial investment
d) The internal rate of return (IRR) of a project

Answer

Answer: a) The time it takes to recover the initial investment in a project

Q182. Which capital budgeting technique considers the timing and magnitude of cash flows?
a) Payback period
b) Accounting rate of return (ARR)
c) Net present value (NPV)
d) Profitability index (PI)

Answer

Answer: c) Net present value (NPV)

Q183. Which of the following is a limitation of the payback period as a capital budgeting technique?
a) It considers the time value of money.
b) It ignores cash flows beyond the payback period.
c) It accounts for the project’s profitability.
d) It is easy to calculate and understand.

Answer

Answer: b) It ignores cash flows beyond the payback period.

Q184. Which capital budgeting technique accounts for the risk of a project by discounting cash flows at a specific rate?
a) Payback period
b) Accounting rate of return (ARR)
c) Net present value (NPV)
d) Internal rate of return (IRR)

Answer

Answer: d) Internal rate of return (IRR)

Q185. Which capital budgeting technique uses the concept of “time value of money”?
a) Payback period
b) Accounting rate of return (ARR)
c) Net present value (NPV)
d) Profitability index (PI)

Answer

Answer: c) Net present value (NPV)

Q186. In capital budgeting, the profitability index (PI) is useful for:
a) Identifying the required rate of return for a project
b) Comparing the profitability of different projects
c) Calculating the payback period of an investment
d) Evaluating the risk associated with a project

Answer

Answer: b) Comparing the profitability of different projects

Q187. Which of the following factors affect the selection of an appropriate discount rate for net present value (NPV) calculations?
a) The riskiness of the project
b) The industry average rate of return
c) The payback period of the project
d) The profitability index (PI) of the project

Answer

Answer: a) The riskiness of the project

Q188. Which of the following capital budgeting techniques takes into account the cash flows throughout the project’s life and the time value of money?
a) Payback period
b) Accounting rate of return (ARR)
c) Net present value (NPV)
d) Profitability index (PI)

Answer

Answer: c) Net present value (NPV)

Q189. Which capital budgeting technique provides a measure of the percentage return on the initial investment?
a) Payback period
b) Accounting rate of return (ARR)
c) Internal rate of return (IRR)
d) Profitability index (PI)

Answer

Answer: b) Accounting rate of return (ARR)

Q190. Which of the following is a type of debt source of finance?
a) Ordinary shares
b) Convertible securities
c) Commercial paper
d) ADRs

Answer

Answer: c) Commercial paper

Q191. Equity financing involves:
a) Borrowing funds from financial institutions
b) Issuing shares to investors
c) Securitizing assets
d) Leasing equipment

Answer

Answer: b) Issuing shares to investors

Q192. Preference shares are considered as a:
a) Debt source of finance
b) Hybrid source of finance
c) Short-term source of finance
d) Equity source of finance

Answer

Answer: b) Hybrid source of finance

Q193. Leasing is a financing option that involves:
a) Borrowing funds from banks
b) Issuing shares to investors
c) Renting assets for a specific period
d) Factoring receivables

Answer

Answer: c) Renting assets for a specific period

Q194. Which of the following is a short-term source of finance?
a) Term loans
b) Public deposits
c) Debentures
d) Convertible securities

Answer

Answer: b) Public deposits

Q195. Which institution is a potential source of short-term finance?
a) Venture capital funds (VCFs)
b) Foreign institutional investors (FIIs)
c) Banks
d) Factoring companies

Answer

Answer: c) Banks

Q196. What is the purpose of securitization?
a) Leasing equipment
b) Raising funds through public deposits
c) Converting debt into equity
d) Converting illiquid assets into tradable securities

Answer

Answer: d) Converting illiquid assets into tradable securities

Q197. Working capital advances by commercial banks are an example of:
a) Short-term financing
b) Debt financing
c) Hybrid financing
d) Equity financing

Answer

Answer: a) Short-term financing

Q198. Commercial paper is a type of:
a) Long-term debt instrument
b) Short-term debt instrument
c) Equity instrument
d) Hybrid instrument

Answer

Answer: b) Short-term debt instrument

Q199. Factoring and forfaiting are methods used to:
a) Lease equipment
b) Raise long-term debt
c) Convert debt into equity
d) Manage accounts receivable

Answer

Answer: d) Manage accounts receivable

Q200. Which source of finance involves raising funds by selling company shares to the general public?
a) Commercial paper
b) Leasing
c) Public deposits
d) Initial public offering (IPO)

Answer

Answer: d) Initial public offering (IPO)

Study other MCQ Set of Fundamentals of Financial Management

• Fundamentals of Financial Management mcq practice set 1
• Fundamentals of Financial Management mcq practice set 2
• Fundamentals of Financial Management mcq practice set 3
• Fundamentals of Financial Management mcq practice set 4
• Fundamentals of Financial Management mcq practice set 5
• Fundamentals of Financial Management mcq practice set 6
• Fundamentals of Financial Management mcq practice set 7
• Fundamentals of Financial Management mcq practice set 8