Finance and Budgeting Questions

Q1. The following chart shows revenue and cost figures for a product development effort over a five year period of time. In what year does payback occur?

Q2. Wages for a project are $50,000. Fringe benefits and overhead add up to an additional $100,000. What is the loading or burden rate for the work effort?
a. $50,000
b. 2.00
c. 3.00
d. $100,000

Q3. When viewing the Net Present Value (NPV) of an investment opportunity, you are looking at:
a. The rate of return on your investment over a fixed period of time
b. The profit associated with your future investment measured in terms of today's dollars
c. The point of time in which the investment finally has returns that are greater than outlays
d. Discounted, pre-tax profits

Q4. It is generally a good idea to develop budget worksheets as a precursor to full fledged budgets.
a. true
b. false

Q5. In options trading, strike price is the price of a stock determined by market forces.
a. true
b. false

Q6. Crashing a schedule entails:
a. adding extra resources to the job to speed things up
b. abandoning a schedule, and replacing it with a new one that takes into account current information
c. recognizing that because a schedule will not be achieved, it should be abandoned
d. lengthening the amount of time tasks need to be carried out in order to reflect the realities of getting a job done

Q7. Capital expenditures are those that will benefit the firm for a period of time of more than a year.
a. true
b. false

Q8. Zero based budgeting looks at last year's expenditures as the basis of computing this year's budget.
a. true
b. false

Q9. At the beginning of the year, Hank puts $100,000 into an investment. At the end of the year, the investment is completed and he is given a check for $110,000. Meanwhile, Susan puts $100,000 in another investment, and receives $140,000. In retrospect, what was Hank's opportunity cost?
a. $30,000
b. $40,000
c. $100,000
d. $110,000

Q10. I need two designers working three days each to design a new software system. One code-writer will spend eleven days writing software to implement the design. One tester will test and correct the resulting code over three days. What is the level of effort associated with this project?
a. 20 person days
b. $2,525
c. 15 days
d. Cannot compute without data on indirect costs

Q11. In doing benefit-cost analysis, you often encounter situations where an element of the analysis can be treated as either a cost or benefit.
a. true
b. false

Q12. A frequently encountered problem with budgets is that the project cost data that forms the basis of the budget is often based on optimistic assumptions.
a. true
b. false

Q13. Treasury notes and bonds are examples of:
a. Risky investments
b. Above zero risk options
c. Zero risk options
d. Unreliable measures of rate of return on investments

Q14. In making decisions using benefit-cost analysis, analysts often find themselves struggling to deal with trade-offs between benefits and costs.
a. true
b. false

Q15. If a frost causes widespread damages to orange crops in Florida, and this leads to a jump in the price of oranges, this can be captured by movement along the demand curve.
a. true
b. false

Q16. Which of the following items is an example of direct costs?
a. The cost of lumber used in building a structure
b. Lease payments for office space
c. Cost of heating and air conditioning
d. Salaries of supervisors, secretaries, and attorneys

Q17. Following are the benefit-cost ratios for three investment opportunities. Which is the best investment?

Q18. A price elasticity of 1.2 indicates that:
a. an item costs 20% more after an increase in demand than before
b. a 10% increase in demand leads to a 12% increase of revenue
c. a 1% increase in quantity demanded, leads to a 1.2% decrease in price
d. a 1% increase in price, leads to 1.2% decrease in quantity demanded

Q19. In SWOT analyses, 'weakness' refers to:
a. internal factors that can harm project performance
b. external factors that can harm project performance
c. situations where costs exceed benefits
d. projects that have not yet achieved profitability

Q20. An assessment of high impact project requirements finds that the following requirements have varying beneficial impacts (indicated by percentage figure in parentheses). The Pareto Rule suggests which requirements should be addressed first?

Requirements and their corresponding beneficial impacts: A (2%), B (50%), C (2%), D(5%), E(10%), F(1%), G (30%), H (1%), I (2%), J(2%)
a. A, C, F, H, I, J
b. B, G
c. B, G, E
d. A, B, E

Q21. If a product has a low price elasticity of demand, this indicates that there is little demand for that product.
a. true
b. false

Q22. The Caldor-Hicks criterion is an approach to determining the benefits associated with public sector projects.
a. true
b. false

Q23. A benefit-cost ratio is a measure of how efficiently investment dollars are being used.
a. true
b. false

Q24. NPV and IRR analyses are basically the same, but viewed from different perspectives.
a. true
b. false

Q25. An advantage that the accrual method has over the cash method of accounting is that:
a. It is an insurance against financial scandals
b. It makes it more difficult for a company to overstate its revenues
c. The cost of doing a job is tied to the time period when payment was made for the work effort
d. The cost of doing a job is tied to the time when the work was done

Q26. In principle, the salary paid a worker should be:
a. less than the required level of profit
b. equal to minimum wage requirements
c. determined by opportunity costs of the investment opportunity
d. less than the worker's value marginal product

Q27. An important component of cost of capital is:
a. your estimate of cash outflows
b. your estimate of cash inflows
c. the level of risk you are facing in the investment
d. the size of the initial investment

Q28. The ratio of discounted benefit streams divided by discounted cost streams is commonly called:
a. Profitability index
b. NPV index factor
c. IRR index factor
d. Buss's discounting and rank-ordering technique

Q29. IRR is the best capital budgeting technique because it identifies the rate of return on an investment.
a. true
b. false

Q30. The financial tool that shows the profitability of an enterprise is called:
a. a cash flow statement
b. a balance sheet
c. a pro forma statement
d. an income statement

Q31. If your project was supposed to have spent $100,000 to date, has actually spent $120,000, but has done $80,000 worth of work (your earned value), what is your cost variance according to the earned value management perspective?
a. on target performance
b. $20,000 overrun
c. $40,000 overrun
d. $60,000 overrun

Q32. The issue of determining how to weigh costs and benefits for different players who are being examined in a benefit-cost analysis (e.g., Who should count more: rich people or poor people) is an example of:
a. the equity problem
b. the extrapolation problem
c. the aggregation problem
d. the negation problem

Q33. When preparing a bid price for a project, Debby uses the following data: John's salary ($20,000), Mary's salary ($30,000), cost of materials ($10,000), required profit ($10,000). What is the bid price for doing the project?
a. $70,000
b. $60,000
c. More than $70, 000, because cost overruns always occur
d. More than $70,000 in order to include indirect costs

Q34. A budget variance of -10% for expenditures during the month of April shows that a project is:
a. losing money
b. will face a cost overrun at its conclusion
c. is still on target
d. We don't have enough information to determine budget status

Q35. The best way to develop a budget is to identify all the things you want and to include these items in the budget
a. true
b. false

Q36. The coding system by which project data are organized is called:
a. the code of accounts
b. the general ledger
c. the cost account
d. the chart of accounts

Q37. On the balance sheet, patented technology should appear as:
a. a short term asset
b. a long term asset
c. a short term liability
d. a long term liability

Q38. A call option is the opportunity to sell a stock at a given price within a defined time frame.
a. true
b. false

Q39. Critics of using NPV analysis for the purpose of making investment decisions maintain that:
a. you cannot use it productively, since it is impossible to know what cash flows will be
b. it is biased against long-term investments
c. it only shows the relative performance of a project and not absolute levels of profitability
d. it does not take into account risk

Q40. The IRR figure resulting from an analysis of projected cash flows can be used:
a. to negotiate an interest rate for a bank loan
b. to measure the profitability of the investment
c. to assess the payback point of the investment
d. to compare the investment opportunity being examined with other investment opportunities.