Certified Financial Management Specialist Practice Exam

What financial activity involves evaluating whether new projects are viable investments?

1. Asset Allocation

2. Capital Budgeting

3. Expense Analysis

4. Profit Forecasting

The correct answer is: Capital Budgeting

Capital budgeting is the financial activity specifically focused on evaluating whether new projects are viable investments. This process involves assessing potential expenditures or investments in long-term assets and determining their potential returns. Financial managers analyze various projects to decide which investments will best contribute to the company's growth and profitability. During capital budgeting, different tools and techniques are used, such as net present value (NPV), internal rate of return (IRR), and payback period analysis. These methods help quantify the expected benefits of investing in projects while considering initial costs and the time value of money. By systematically analyzing these factors, organizations can make informed decisions regarding which projects to pursue. In contrast, choices like asset allocation refer to distributing investments across various asset classes to manage risk and return, expense analysis focuses on reviewing and controlling costs, and profit forecasting pertains to estimating future profits based on current data and trends. While all these activities are important within financial management, they do not directly involve the evaluation of new project viability in the way capital budgeting does.