When making a capital budgeting decision, which of the following are NOT relevant? The size of a cash flow The risk of a cash flow The accounting earnings from a cash flow The timing of a cash flow Multiple Choice I only II only III only II and III only III and IV only They are all relevant.
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- h. What does the term “risk” mean in the context of capital budgeting; to what extent can risk be quantified; and, when risk is quantified, is the quantification based primarily on a statistical analysis of historical data or on subjective, judgmental estimates? i. 1. What are the three types of risk that are relevant in capital budgeting? 2. How is each of these risk types measured, and how do they relate to one another? 3. How is each type of risk used in the capital budgeting process? j. 1. What is sensitivity analysis? 2. Perform a sensitivity analysis on the cost per unit, unit sales, and salvage value. Assume each of these variables can vary from its base-case, or expected, value by plus or minus 10%, 20%, and 30%. Include a sensitivity graph, and discuss the results. 3. What is the primary weakness of sensitivity analysis? What is its primary usefulness?In the evaluation of cash flows in a capital budgeting decision , which of the following must be considered? I. The size of the cash flow II. The timing of the cash flow III. The risk of the cash flow a. I only b. I and II only c. II only d. II and III only e. I, II and IIIWhich of the following is not a reason for risk and uncertainty in capital budgeting? a. Decisions are based on expected cash flows b. All decisions are based on forecasts c. Decisions are based on past cash flows d. All forecasts are subject to uncertainty Clear my choice
- Which capital budgeting technique defines returns in terms of income instead of cash flows? a) The payback period b) The internal rate of return technique c) The net present value technique d) The unadjusted rate of return methodWhy does capital budgeting rely on analysis of cash flows rather than on net income? Use an example to explain.What does the term “risk” mean in the context of capital budgeting; to what extent can risk be quantified; and when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on subjective, judgmental estimates?
- Which of the following methods of capital budgeting tries to equate the present value of cash inflows to present value of cash outflows? a. Net present value b. Payback period c. Internal rate of return d. Accounting Rate of returnWhich of the following is not a method for incorporating risk analysis into capital budgeting? a. Positive/Negative analysis b. Monte Carlo simulations c. Scenario analysis d. Sensitivity analysis e. Decision tree modelsThe IRR method and NPV method can differ in ranking of capital budgeting decisions. What causes this?
- Generally, which of the following measurements is considered the best single criterion in capital budgeting decisions? a. WACC b. Internal rate of return c. Payback d. Net present valueWhy are discounted cash flow methods of making capital budgeting decisions superior to allother methods?What two pieces of information does the payback method providethat are absent from the other capital budgeting decision methods?