Reading 44: Capital Budgeting - LOS c ～ Q1-3

determine, executive, capital, company, budget

Q1. Rosalie Woischke is an executive with ColaCo, a nationally known beverage company. Woischke is trying to determine the firm’s optimal capital budget. First, Woischke is analyzing projects Sparkle and Fizz. She has determined that both Sparkle and Fizz are profitable and is planning on having ColaCo accept both projects. Woischke is particularly excited about Sparkle because if Sparkle is profitable over the next year, ColaCo will have the opportunity to decide whether or not to invest in a third project, Bubble. Which of the following terms best describes the type of projects represented by Sparkle and Fizz as well as the opportunity to invest in Bubble?

Sparkle and Fizz Opportunity to invest in Bubble

A) Independent projects Add-on project

B) Mutually exclusivve projects Project sequencing

C) Independent projects Project sequencing

Q2. The Chief Financial Officer of Large Closeouts Inc. (LCI) determines that the firm must engage in capital rationing for its capital budgeting projects. Which of the following describes the most likely reason for LCI to use capital rationing? LCI:

A) must choose between projects that compete with one another.

B) has a limited amount of funds to invest.

C) would like to arrange projects so that investing in a project today provides the option to accept or reject certain future projects.

Q3. Project sequencing is best described as:

A) arranging projects in an order such that cash flows from the first project fund subsequent projects.

B) prioritizing funds to achieve the maximum value for shareholders, given capital limitations.

C) an investment in a project today that creates the opportunity to invest in other projects in the future.