YOUTUBE CHANNEL-ACCOUNTS WITH CHIRAG

BY-CHIRAG SIR (NET, CA/CS FINAL, MCOM (ABST)

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MCQ OF CAPITAL BUDGETING part-2

1. The conflicts in project ranking in capital budgeting as per NPV and IRR may arise because of June, 2012

(A) Size disparity

(B) Time disparity
(C) Life disparity
(D) All of these

2. Which one refers to cash inflow under payback period method? June, 2012
(A) Cash flow before depreciation and taxes
(B) Cash flow after depreciation and taxes
(C) Cash flow after depreciation, but before taxes
(D) Cash flow before depreciation and after taxes

3. The concept of present value is based on the June, 2012

(A) Principle of compounding
(B) Principle of discounting
(C) Both (a) and (b)
(D) None of these

4. If NPV is positive, the IRR will be:-

(A) Positive Dec, 2009
(B) K = R
(C) K < R
(D) None of the above

5. Which method does not consider the time value of money? Dec, 2012
(A) Net Present Value
(B) Internal Rate of Return
(C) Average Rate of Return
(D) Profitability Index

6. Arrange the following steps involved in capital budgeting in order of their occurrence- Dec, 2012
1. Project selection 4. Follow-up
2. Project appraisal 5. Project execution
3. Project generation

Codes
 (A) 2,3,1,5,4
(B) 3,2,1,5,4
(C) 1,3,2,5,4
(D) 1,2,3,4,5

7. Positive NPV in project appraised by a firm may not occur an account of- June, 2013
(A) economies of scale
(B) market research
(C) product differentiation
(D) intangible benefits

8. In case the project are divisible under capital rationing an appropriate project appraisal method is-
(A) Net present value method June, 2013
(B) Profitability index method
(C) Internal rate of return method
(D) Payback period method

9. Assertion (A) The IRR of project is the discount rate which reduces its NPV to zero.
Reason (R) A project is worth accepting if the IRR exceeds the cost of capital. Dec, 2013
(A) A is true, but R is false
(B) Both A and R are true
(C) A is false, but R is true
(D) Both A and R are false

10. Under which of the following situation, the decision outcome on evaluation of investment opportunities
varies under NPV and IRR Methods per se? June, 2019
(A) Time disparity
(B) Cost disparity
(C) Life disparity
(D) Volume disparity
Choose the correct combination of situation:
1. (A) and (D) only
2. (B) and (D) only
3. (A), (B) and (C) only
4. (B), (C) and (D) only

11. Which of the following variables is not known in Internal Rate of Return method of Capital Budgeting?
(A) Life of the project Dec, 2018
(B) Discount rate
(C) Amount of cash outflows
(D) Amount of cash inflows
12. Match List-1 with List 2 and select the correct answer using the codes given below the lists:

List 1 List 2 Dec, 2014

(a) Pay-back Rate of Return 1. Discounted cash flow technique

(b) Internal Rate of Return 2. Compounded values of investments and returns
(c) Benefit-Cost Ratio 3. Crude method for project evaluation
(d) Net Terminal Value Method 4. Varying sized project evaluation

Codes:

a b c d

(A) 2 3 1 4
(B) 3 1 4 2
(C) 1 4 2 3
(D) 4 2 3 1

13. In certainty equivalent approach, adjusted cash flows are discounted at- June, 2015
(A) Accounting Rate of Return Jan, 2017
(B) Internal Rate of Return
(C) Hurdle Rate
(D) Risk Free Rate

14. Statement – 1 In Payback period method, the risk of the project is adjusted by lessening the target payback
period. Nov, 2017

Statement – 2 Sensitivity Analysis helps in calculation of net present value of the proposal.

Code:

(1) Statement – 1 is correct, but statement – 2 is wrong

(2) Statement – 1 is wrong, but statement – 2 is correct
(3) Statement – 1 and statement – 2, both are correct
(4) Statement – 1 and statement – 2, both are wrong

15. Sensitivity analysis is performed to

(A) ascertain risk Dec, 2009
(B) determine profitability
(C) build scenario for risk profile
(D) none of the above
 DIVISIBLE PROJECTS are those projects that can be accepted or rejected partly.

INDIVISIBLE PROJECTS are those projects that can be accepted or rejected wholly.
For ex. T ltd has Rs. 12, 00,000 of available fund for investment during the year 2019. Determine the optimal
combination of projects:-

Projects Initial Investment P.V. of cash inflow Net Present Value P.I. Rank

A 4, 00,000 4, 80,000 80,000 1.2 3

B 12, 00, 000 13, 40,000 1, 40,000 1.12 5

C 2, 00,000 2, 64,000 64,000 1.32 1

D 8, 00,000 9, 00,000 1, 00,000 1.13 4

E 4, 00,000 5, 20,000 1, 20,000 1.3 2

Assuming the project is divisible.

Rank project Initial investment cumulative investment

1 C 2, 00,000 2, 00,000

2 E 4, 00,000 6, 00,000

3 A 4, 00,000 10, 00,000

4 D 2, 00,000 12, 00,000

Since projects are divisible therefore the firm can invest only 2, 00,000 in project D i.e. 25% of project D.

Assuming the project is indivisible.

Feasible combinations Total Outflow Aggregate NPV’s

A, D 12, 00,000 1, 80,000

A, C, E 10, 00,000 2, 64,000

B 12, 00,000 1, 40,000

C, D 10, 00,000 1, 64,000

D, E 6, 00,000 2, 20,000

Optimal project mix is the combination of A, C and E because it gives maximum NPV’s of Rs. 2, 64,000