MCQ Bank

A) If the firm wishes to accept projects with high degree of liquidity.
B) If the firm wishes to avoid the higher forecasting errors associated with cash flow a long way into the future.
C) All of the given options
D) If the firm wishes to avoid projects that require a large amount of research and development.

AI Explanation

The payback period emphasizes quick recovery of the initial investment and therefore supports liquidity. It also reduces exposure to distant cash-flow forecasting errors and can discourage projects requiring long-term R&D spending.

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Q61

In which method of depreciation, we divide the cost of asset with its useful life?

A) MACRS
B) Sum of the years digit
C) Straight line
D) Declining value

AI Explanation

Under the straight-line depreciation method, the depreciable cost of an asset is allocated evenly over its useful life. Thus, annual depreciation is based on dividing the depreciable cost by the useful life.

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Q62

Which of the following represents the linear relation between Net Present Value (NPV) and Profitability Index (PI)?

A) If Profitability Index > 1, NPV is Zero (0)
B) If Profitability Index > 1, NPV is Positive (+)
C) If Profitability Index > 1, NPV is Negative (-)
D) If Profitability Index < 1, NPV is Positive (+)

AI Explanation

A profitability index greater than 1 means the present value of future cash inflows exceeds the initial investment. Therefore, the project's NPV must be positive.

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Q63

An investment will be ___________ if the IRR doesn’t exceeds the required return and ___________ otherwise.

A) Accepted; accepted
B) Accepted; rejected
C) Rejected; rejected
D) Rejected; accepted

AI Explanation

A project is rejected when its IRR does not exceed the required rate of return because it fails to meet the required return. It is accepted when IRR exceeds the required return.

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Q64

Which of the following rate makes the Net Present Value (NPV) equal to zero?

A) Average Accounting Return (AAR)
B) Required Rate of Return (RRR)
C) Internal Rate of Return (IRR)
D) Weighted Average Cost of Capital (WACC)

AI Explanation

The Internal Rate of Return is the discount rate at which the present value of cash inflows equals the present value of cash outflows. Consequently, NPV is exactly zero at the IRR.

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Q65

A project whose acceptance does not prevent or require the acceptance of one or more alternative projects is referred to as a(n):

A) mutually exclusive project
B) contingent project
C) independent project
D) dependent project

AI Explanation

An independent project can be accepted or rejected without affecting the acceptance of other projects. Its cash flows and investment decision are independent of alternative projects.

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Q66

Which one of the following costs refers to an outlay that has already occurred and hence is not affected by the decision under consideration ?

A) Opportunity
B) Sunk
C) Fixed
D) Variable

AI Explanation

A sunk cost is an outlay that has already occurred and cannot be changed by the current decision. Therefore, it should not affect the choice between investment alternatives.

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Q67

Which of the following dividend growth model is used for calculating the total return?

A) R= Do/Po + g
B) R= Do/Po - g
C) R= D1/Po + g
D) R= D1/Po - g

AI Explanation

The dividend growth model expresses total expected return as the dividend yield plus the expected growth rate. Dividend yield is D1/P0, so the formula is R = D1/P0 + g.

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Q68

In MACRS property classes, 7-year class includes which of the following ?

A) Most industrial equipment
B) Autos & computers
C) All of the given options
D) Equipment used in research

AI Explanation

Under MACRS, most industrial equipment is classified as 7-year property. Autos and computers are generally 5-year property, while certain research equipment may fall into different classes.

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Q69

Over the past four years, a company has paid dividends of Rs. 1.00, 1.10, 1.20 and 1.30 in Year 1, 2, 3 and 4 respectively. The same pattern is expected to continue in the future as well. This is an example of a company paying dividends that grows by:

A) A decreasing amount
B) 10 percent each year
C) At a decreasing rate
D) At a constant rate

AI Explanation

The dividend increases by a constant amount of Rs. 0.10 each year, but the percentage growth rate changes. Therefore, the dividends grow at a decreasing rate rather than at a constant percentage rate.

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Q70

A grant of authority which gives one entity or person the authority to vote for another. This refers to which of the following voting procedures?

A) Staggering
B) Cumulative
C) Proxy
D) Straight

AI Explanation

A proxy is a grant of authority that allows one person or entity to vote on behalf of another shareholder. Proxy voting is commonly used when shareholders cannot attend a meeting personally.

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Q71

Suppose the initial investment for a project is Rs. 16 million and the cash flows are Rs. 4 million in the first year and Rs. 9 million in the second and Rs. 5 million in the third. The project will have a payback period of:

A) 4.1 Years
B) 2.6 Years
C) 3.1 Years
D) 3.7 Years

AI Explanation

After two years, cumulative cash flow is Rs. 13 million, leaving Rs. 3 million to recover. The third-year cash flow is Rs. 5 million, so payback = 2 + (3/5) = 2.6 years; therefore, option B is mathematically correct, not C.

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Q72

An investment plan is acceptable if its NPV is:

A) All of the above
B) Equal to ZERO
C) Greater than ZERO
D) Less than ZERO

AI Explanation

An investment is normally accepted when its NPV is positive because it adds value to the firm. A negative NPV indicates value destruction, while zero NPV generally means the investor is indifferent.

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Q73

What is the amount of net working capital if, taxes, account receivable, account payable and company’s fix cost for current year are given 8000, 82,000, 67,000 and 15,000 respectively?

A) Rs. 172,000
B) Rs. 38,000
C) Rs. 8,000
D) Rs. 15,000

AI Explanation

Net working capital is calculated as current assets minus current liabilities. Using accounts receivable of Rs. 82,000 and accounts payable of Rs. 67,000 gives Rs. 15,000, so none of the listed choices matches the standard calculation.

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Q74

Which one of the following is a non-cash item?

A) Inventory
B) Purchases
C) Sales
D) Depreciation

AI Explanation

Depreciation is a non-cash expense because it reduces accounting profit without requiring a current cash payment. Inventory, purchases, and sales involve cash-flow effects even though their timing may differ.

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Q75

Which of the following statement is TRUE regarding Average Accounting Return?

A) An investment is acceptable if its AAR is less than a benchmark AAR
B) AAR is a rate that makes the NPV equal to zero
C) An investment is acceptable if its AAR is greater than a benchmark AAR
D) None of the given options

AI Explanation

Under the Average Accounting Return (AAR) criterion, a project is accepted when its AAR exceeds the benchmark or target AAR. A higher AAR indicates better accounting profitability relative to the required benchmark.

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Q76

Based upon AAR technique, a project is acceptable if:

A) Target average accounting return exceeds to average accounting return
B) Target average accounting return equal to average accounting return
C) Average accounting return equal to target average accounting return
D) Average accounting return exceeds to target average accounting return

AI Explanation

A project is acceptable under the AAR method when its calculated average accounting return exceeds the target or benchmark AAR. This indicates that the project provides the required level of accounting profitability.

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Q77

Which of the following option shows the two correct components of required rate of return?

A) Dividend & stock price (Po)
B) Dividend yield & growth rate
C) Dividend yield & stock price (Po)
D) Dividend & growth rate

AI Explanation

The required rate of return under the dividend growth model is the sum of the dividend yield and expected dividend growth rate. Thus, the two components are dividend yield and growth rate.

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Q78

As the dividend is always same for a zero growth stock, so the stock can also be viewed as:

A) Ordinary perpetuity
B) Ordinary Annuity
C) None of the given options
D) Annuity Due

AI Explanation

A zero-growth stock pays the same dividend indefinitely. Because these equal payments continue forever, the stock can be valued as an ordinary perpetuity.

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Q79

A project having non-conventional cash flows is actually a characteristics of:

A) NPV
B) AAR
C) IRR
D) PI

AI Explanation

Non-conventional cash flows can cause a project to have multiple changes in the direction of cash flows. This can result in multiple IRRs, making IRR particularly problematic for such projects.