M.

Com SEMESTER – I:
ADVANCED FINANCIAL MANAGEMENT - MCQ’s IN CAPITAL BUDGETING

1. Which of the following is/are true regarding the measurement of cash inflows
and outflows of a project?

a. Depreciation amount should be added to Earnings before Tax.

b. Depreciation amount should be added to Earnings after Tax.
c. Depreciation should neither be added to nor be subtracted from Earning after
Tax.
d. Both (a) and (c).

2. Net Salvage Value of fixed assets is equal to

a. Excess of Salvage Value over book Value
b. Excess of book Value over Salvage Value.
c. Working Capital requirement in the first year
d. Salvage Value of fixed assets less any income tax payable on the excess of
salvage vale over book value.
3. Accounting Rate of Return is the ratio of average values of
a. Profit before tax to book value of the investment.
b. Profit after tax to salvage value of the investment.
c. Profit before tax to present value of the investment.
d. Profit after tax to book value of the investment.
4. Which of the following statement(s) regarding IRR is/are true?
a. A project can have only one IRR.
b. If IRR is less than the firm’s cost of capital, the project should be rejected.
c. A project can have multiple IRR depending on the cash flow streams.
d. Both (b) and (c).
5. Which of the following is/are false regarding Accounting rate of Return?
i. Depreciation is not considered for its calculation.
ii. Depreciation is added back to the annual income.
iii. For decision making, ARR of a project is compared with that of the
firm or industry as a whole.
iv. If ARR is greater than one for a project, it should be accepted.
a. Only (ii) and (iv) above.
b. Only (ii) and (iii) above.
c. Only (i), (ii) and (iv) above.

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 d. Only (ii), (iii) and (iv)
6. Incremental cash flows in relation to capital budgeting decision refer to the:
a. Cash flows which are increasing over a period of time.
b. Incremental change in cash flows if the project is extended one year beyond
its life period.
c. Cash flows which are directly attributable to the investment.
d. Difference between cash inflow streams and the initial outflow.
7. Which of the following is/are considered for defining cash flows for a project
involving a capital budget decision?
a. Interest on short-term bank borrowings must be included.
b. Interest on long-term debt must be excluded.
c. Interest on long-term borrowings should be treated only when principal is
repaid in lump sum.
d. Both (a) and (b).
8. Which of the following appraisal criterion does not take into account the
remaining cash flows once the initial investment is recovered?
a. Internal Rate of Return c. Accounting Rate of Return.
b. Pay-back Period. d. Net Present Value.
9. Which of the following appraisal criterion does not take into account the
remaining cash flows once the initial investment is recovered?
a. Sometimes IRR fails to indicate correct choice between mutually exclusive
projects.
b. Pay-back Period is widely used since it is a measure of profitability.
c. One of the demerits of NPV is that is sensitive to discount rates.
d. Both (b) and (c).
10. Which of the following is NOT a principle underlying measurement of cash
flows from the long-term funds point of view?
a. All non-cash charges should be defined in pre-tax terms.
b. Cash flows should be defined in post-tax terms.
c. Only incremental cash flows should be considered.
d. None of the above.
11. Which of the following evaluation criteria does not consider time value of
money?
a. Benefit – cost ratio c. Pay-back period.
b. IRR d. Net benefit cost ratio

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12. Which of the following is/are not drawback(s) of the Accounting Rate of Return
criteria?
a. It gives equal weightage to near-flows and distant flows.
b. It is calculated using the accounting income and not cash flows.
c. The cut-off ARR is arbitrarily fixed.
d. None of the above.
13. Which of the following is/true about NPV?
a. It considers all the cash flows
b. It considers time value of money.
c. It gives more weightage to distant flows than to near flows.
d. Both (a) and (b).
14. Cash flows occurring from a project in different periods are not comparable
unless:
a. Interest rates are expected to be stable.
b. The flows occur periodically every year.
c. Interest can be earned on the cash flows.
d. The flows have been discounted to a single date.
15. In IRR, the cash inflows are assumed to be reinvested in the project at:
a. Internal Rate of Return. c. Cost of Capital
b. Marginal Cost of Capital d. Risk-adjusted Rate.

16. For a project, benefit cost ratio is equal to one, then the:
a. IRR>1. c. IRR > Discount Rate
b. IRR<Discount Rate d. IRR=Discount Rate.

17. If Net Present Value for a project is negative, then

a. IRR=Cost of Capital c. IRR>Cost of Capital
b. Benefit Cost Ratio>1 d. IRR<Cost of Capital
18. Which of the following statement is True?
a. Capital expenditure benefits accrued only in the current period.
b. Pay-back period method selects a project based on the profitability before
the pay-off period.
c. Internal Rate of Return to take into account time value of money.
d. Net Present Value method uses Cost of Debt as a Discounting

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19. Which of the following is true?
a. If K=IRR, NPV=0 c. If K> IRR, NPV<0
b. If IRR>K, NPV<0 d. Both (a) and (b)
20. While formulating net cash flows for capital investment appraisal the “interest
exclusion principle” is followed because:
a. The “means of financing” are not clearly known at the time of appraisal.
b. The basic objective is to obtain a measure of financial attractiveness
irrespective of the “means of financing”.
c. The fallacy of double counting under the discounted cash flow techniques
is to be avoided.
d. The interest is not a cash flow expenditure.
21. Which of the following can be considered as the limitations of using Average
Rate of Return, for investment appraisal?
a. It is simple to calculate. d. It is somewhat akin to the break-even point.
b. It considers benefit over the entire life of project.
c. It is based upon accounting profit, and not cash flows.
22. In a capital budgeting decision incremental cash flows mean:
a. Cash flows which are increasing.
b. Cash flows occurring over a period of time.
c. Cash flows directly related to the project.
d. Difference between cash inflows and cash outflows for each and every
expenditure.
23. Which of the following technique of project appraisal does not consider the time
value of money?
a. Benefit Cost Ratio c. Net Present Value
b. Internal Rate of Return d. Accounting Rate of Return.
24. If the benefit cost ratio of a project is unity, then its NPV
a. Will be 0 b. will be plus 1 c. will be minus 1 d. None.
25. If two projects are mutually exclusive and differ substantially in terms of the
initial outlays and subsequent expenses, which of the following criteria of
evaluation is best suited?
a. Pay-back period. b. NPV c. ARR d. Annual Capital Charge