FIN 320F Unit 5 Questions and Answers
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What is the main objective of capital budgeting?
The main objective of capital budgeting is to evaluate and select long-term investment
projects that will maximize a company's value and profitability.
How is the Present Value of an investm...
✔✔ The main objective of capital budgeting is to evaluate and select long-term investment
projects that will maximize a company's value and profitability.
How is the Present Value of an investment calculated?
✔✔ The Present Value is calculated by discounting future cash flows back to their value today
using a specified discount rate.
What does a negative Net Present Value (NPV) indicate about a project?
✔✔ A negative NPV indicates that the project's expected cash flows are less than the initial
investment, suggesting it may not be a profitable investment.
How do you use the Internal Rate of Return (IRR) to compare projects?
✔✔ The IRR is compared to the company's required rate of return; if IRR exceeds this rate, the
project is considered favorable.
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, Why is the payback period a commonly used metric for investment decisions?
✔✔ The payback period is used because it provides a simple measure of how quickly an
investment will return its initial cost.
What does the Profitability Index (PI) measure in capital budgeting?
✔✔ The Profitability Index measures the relative profitability of an investment by comparing the
present value of future cash flows to the initial investment.
How does the Discounted Payback Period improve upon the regular Payback Period?
✔✔ The Discounted Payback Period improves upon the regular Payback Period by incorporating
the time value of money, offering a more accurate assessment of investment recovery.
What is the role of risk assessment in evaluating capital projects?
✔✔ Risk assessment helps identify potential uncertainties and financial risks associated with a
project, allowing for better decision-making and risk management.
How can Sensitivity Analysis be used to test the robustness of an investment project?
✔✔ Sensitivity Analysis tests the impact of varying key assumptions or input variables on the
project's financial outcomes to assess its robustness and potential risks.
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