Sample Questions - Capital Budgeting
1. What is capital budgeting?
2. Define the following capital budgeting methods?
a. Payback period
b. Return on Investment (ROI)
c. Net Present Value (NPV)
3. What is the biggest shortcoming of payback period?
4. Why is the NPV method considered a better capital budgeting method than the payback and ROI methods?
5. If you are CEO of a company and you are analyzing a given project with prospective revenues, what are some of the qualitative factors you will consider besides the quantitative capital budgeting methods?
6. Explain briefly how to make a decision of a given investment based on its positive or negative NPV?
7. Ginger Manufacturers wants to invest in a new machine costing $60,000. The company expects a regular annual net cash flow of $10,000 per year for 8 years after which, they expect to sell the machine for $20,000. Calculate;
a. Payback period
b. Return on investment
8. Washington Tenters Inc. specializes in making advanced camping tents. The company is expanding its operations and wants to open a new plant costing $600,000. The company expects varying annual net cash flows as follows;
| Year | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Net Cash Flow | $120,000 | $150,000 | $160,000 | $170,000 | $100,000 |
Please Calculate:
a. Payback period
b. Net Present Value. (Assume the company expected 15% rate of return).
9. Kimco LLC. is tossing the idea of investing in a given project. Kimco wants to invest in a project worthy $250,000 and wants its money back within five years and nothing more than 5 years. What is the expected annual cash flows that Kimco will get in order to accept the project?
10. Medical Experts Inc. is considering to contract an outside company to supply medical equipments for its clients. Medical Experts' managers want to make a decision of choosing between two suppliers who will be contracted for a period of 4 years. The following are the details of the two options:
| Supplier | Initial Investment | Annual Cash Flow | Period in years |
|---|---|---|---|
| Supplier 1 | $150,000 | $50,000 | 4 |
| Supplier 2 | $100,000 | $25,000 | 4 |
Please answer the following questions:
a. What is the Payback period for each of the two options?
b. What is the Net Present Value for each of the two options if the expected rate of return is 10%?
c. Which supplier do you think Medical Experts Inc. should choose?