CFA Level II Vignettes Corporate Finance Capital Budgeting MCQs Test 1

Practice CFA 2026 Level II Vignettes Corporate Finance MCQs from Capital Budgeting. Get instant results with Explanation.

Practice Quiz 1 for "Capital Budgeting" (Corporate Finance). Total 30 MCQs available, split into 3 quizzes. Start with the fundamentals and build a strong base. Mastering these concepts is essential for securing a high percentile in CFA.

General10 MCQs

1. Vignette 1: Capital Budgeting - Case Study: A company is evaluating a new project with an initial investment of $500,000 and expected cash flows of $150,000 per year for 5 years. The company's cost of capital is 12%. Based on the NPV rule, what is the decision? (NPV at 12% is approximately $40,700)

A. Accept if NPV is negativeB. Accept if NPV is positiveC. Accept if IRR is greater than NPVD. Accept if payback period is less than 10 years

2. What is the internal rate of return (IRR)?

A. IRR is always equal to NPVB. IRR is the discount rate that makes NPV positiveC. IRR is the discount rate that makes NPV equal to zeroD. IRR is the cost of capital

3. If NPV and IRR give conflicting decisions for mutually exclusive projects, which decision rule should be followed?

A. Follow NPV because it measures wealth increaseB. Follow IRR because it is easier to understandC. Follow the payback periodD. Follow the profitability index

4. What is a major limitation of the payback period method?

A. It considers the time value of moneyB. It includes all cash flows over the project lifeC. It provides a consistent decision ruleD. It ignores cash flows after the payback period and time value

5. What is the discounted payback period?

A. It ignores the time value of moneyB. It accounts for the time value of money but ignores post-payback cash flowsC. It is the same as the regular paybackD. It always gives the same decision as NPV

General10 MCQs

6. Vignette 2: Capital Budgeting - Case Study: A company must choose between a 3-year project with NPV of $50,000 and a 5-year project with NPV of $70,000. The cost of capital is 10%. Which project has a higher EAA? (3-year annuity factor 2.4869, 5-year annuity factor 3.7908)

A. Net present value (NPV) is the same for all projects regardless of lifeB. The payback period is the best method for unequal livesC. EAA converts the NPV into an annual annuity to compare projects of unequal livesD. IRR is the preferred method for unequal lives

7. Calculate the EAA for each project and determine which to choose.

A. 3-year project EAA = $20,105; 5-year project EAA = $18,467; choose 3-yearB. 3-year project EAA = $18,467; 5-year project EAA = $20,105; choose 5-yearC. Both have the same EAAD. Cannot be determined without more data

8. What is capital rationing and how is it handled?

A. All positive NPV projects should be acceptedB. Capital rationing means unlimited investment fundsC. The payback period is the best method under capital rationingD. Under capital rationing, projects are ranked by profitability index and selected to fit the budget

9. What is the profitability index (PI) formula?

A. (NPV + Initial investment) / Initial investmentB. Present value of future cash flows / Initial investmentC. NPV / Initial investmentD. Initial investment / Present value of future cash flows

10. What is the difference between hard and soft capital rationing?

A. Hard rationing is self-imposedB. Soft rationing is externally imposedC. Hard rationing is external; soft rationing is internalD. Both are the same

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Conducting Body: CFA Institute

Frequency: 4 times a year (February, May, August, November) | Time: 70 Minutes

Negative Marking: No

⚡ Test Pattern (Total: 90 MCQs):

Subject breakdown not available.

Merit Formula: -

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CFA Level II Vignettes Corporate Finance Capital Budgeting MCQs Test 1

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