Question

1. Under conditions of capital rationing (i.e., limited capital funds are available), the optimal allocation of funds to capital investment projects occurs when management uses which one of the following decision models?

a. Internal Rate of Return (IRR)

b. Discounted accounting rate of return

c. Profitability Index (PI)

d. Discounted Payback (WRONG ANSWER)

e. Modified Internal Rate of Return (MIRR).

2. The payback period for evaluating capital investment projects emphasizes:

a. Average net income divided by average investment

b. Average after-tax cash inflow divided by average investment

c. Liquidity

d. Cost of capital

e. Profitability

3. In capital budgeting, the profitability index (PI) decision model is best used to

a. Select projects when capital budgeting funds are limited

b. Adjust for the difference between the accounting rate of return (ARR) and the internal rate of return (IRR)

c. Evaluate mutually exclusive investments of different sizes

d. Adjust for inflation in the net present value (NPV) calculation

e. Adjust for risk in capital budgeting decisions

Answer 1

1. Under conditions of capital rationing (i.e., limited capital funds are available), the optimal allocation of funds to capital investment projects occurs when management uses which one of the following decision models?

Answer : c. Profitability Index (PI)

2. The payback period for evaluating capital investment projects emphasizes:

Answer : c. Liquidity

3. In capital budgeting, the profitability index (PI) decision model is best used to

Answer : a. Select projects when capital budgeting funds are limited