3. Financial Management

Capital Investment Decisions — Quiz

Test your understanding of capital investment decisions with 5 practice questions.

Practice Questions

Question 1

Which of the following best describes the concept of the Profitability Index (PI) in capital investment decisions?

Question 2

A project requires an initial investment of $80,000 and is expected to generate the following cash inflows: $20,000 in year 1, $25,000 in year 2, $30,000 in year 3, and $35,000 in year 4. If the discount rate is 8%, what is the project’s Net Present Value (NPV)?

Question 3

Which of the following is a characteristic of a project with a positive Net Present Value (NPV)?

Question 4

A company is considering a project with an initial investment of $50,000 and expected annual cash inflows of $15,000 for 5 years. If the discount rate is 5%, what is the Profitability Index (PI) of the project?

Question 5

Which of the following best explains why the Internal Rate of Return (IRR) can sometimes give conflicting results when compared to the Net Present Value (NPV) method?