1. Why is capital budgeting important for managers?

a. It enables them to choose investment projects that will increase short-term revenue.

b. It enables them to pass investment decisions off to shareholders.

c. It enables them to choose investment projects that will generate the best returns.

2. Why is capital budgeting important to investors?

a. It shows them how a project will use their money to increase profits.

b. It allows them to directly influence managers' decisions.

c. It guarantees they will earn a high return over a short time period.

3. What is one reason that managers carefully evaluate potential capital investment projects?

a. Capital investment projects are extremely rare.

b. Capital investment projects are almost always unsuccessful.

c. Capital investment projects are usually difficult to reverse.

4. How does discounting calculate the present value of an asset?

a. by multiplying the asset's future value by the interest rate

b. by increasing the asset's future value at a compound interest rate over time

c. by decreasing the asset's future value at a compound interest rate over time

5. To calculate present value (PV), you divide the future value (FV) of the investment by which variable?

a. 1 + 0.02 or 2%

b. 1 + the future value (FV)

c. 1 + the discount rate (R)

6. You want to have $500 saved by the end of one year. your bank's interest rate is 3%. How much money do you need to invest now to reach your goal?

a. $476.19

b. $384.61

c. $485.44

7. Why is the present value calculation for long-term project more complex than for a one-year project?

a. The present value must be calculated by a computer for long-term projects.

b. A present value calculation is only accurate for one year.

c. The present value is calculated for each year differently due to discounting.

8. What does "net" mean in financial terms?

a. the amount of money before any costs are deducted

b. the amount of money that must be returned to shareholders

c. the amount of money left after costs are subtracted

9. Which of these describes the process of finding the present value of a series of cash flows?

a. Find the present value of each cash flow, then multiply them by the future value.

b. Find the present value of each cash flow, then add the results together.

c. Find the future value of each cash flow, then add the results together.

10. If you know the present value of a project, how do you find the NVP?

a. Subtract the initial outlay from the present value.

b. Divide the present value by the initial outlay.

c. Add the initial outlay to the present value.

11. The NVP of a potential project for XYZ Corporation is $5.00. What does this tell the company's financial mangers?

a. The project will result in severe financial loss.

b. The project does not have high profitability or margin for error.

c. The project will result in major financial returns.