CAIIB · Advanced Business & Financial Management · Module B — Advanced Concepts of Financial Management
CAIIB ABFM Unit 11 — Adjustment of Risk and Uncertainty in Capital Budgeting Decision: Free MCQs with Explanations
By Swarnakshi Jha (ex-banker) · Updated 29 October 2026 · Paper III of the December 2026 cycle (Sunday 13 December 2026)
This is the free practice page for CAIIB ABFM Unit 11 — Adjustment of Risk and Uncertainty in Capital Budgeting Decision (Module B — Advanced Concepts of Financial Management). The CAIIB Mock Centre holds 138 questions on this unit alone, every one with a why-right / why-wrong explanation; below are the facts examiners keep returning to, five practice questions with explanations, and the traps that cost marks.
ABFM · Module B138 MCQs in the Mock Centre5 free belowPaper on 13 December
Key facts examiners test from this unit
Risk in capital budgeting and its sources — every cost and revenue figure in a capital budget is an estimate, and risks from many sources can hit sales, cost and profit.
Sensitivity analysis — change one variable at a time, keep the rest at expected values, and see how far NPV moves.
Scenario analysis and the Hillier model — scenarios move all variables together; Hillier measures risk by the standard deviation of NPV.
Changed since the textbook
Income-tax Act, 2025 in force: the 22% company tax regime is section 200 (1 April 2026). The Income-tax Act, 2025 replaced the Income-tax Act, 1961 from 1 April 2026. The optional 22% rate for domestic companies that give up most exemptions (old section 115BAA) continues as section 200; with a flat 10% surcharge and 4% cess, the effective rate is 25.168%. Source: Setindiabiz on corporate tax under the Income-tax Act, 2025
NCLT orders the liquidation of Future Retail (29 July 2024). The Mumbai bench of the National Company Law Tribunal ordered the liquidation of Future Retail Ltd in Bank of India v. Future Retail Ltd, because the maximum period of the corporate insolvency resolution process had expired without a resolution plan approved by the committee of creditors. Source: Bar & Bench
5 free practice questions — tap an option
Five practice questions from this unit. Answers lock on the first tap, exactly as in the exam, and an explanation opens underneath. The Mock Centre has all 138 questions on this unit, from easy to tough, with caselets and key-in numericals, why every other option is wrong and the exam tip — and tracks your score and revision dates.
Question 1 of 5
A firm's new plant succeeds in building demand for its product, but rival firms then enter the market and prices fall below the levels assumed in the appraisal. Which source of risk has materialised?
Why (d): Competition risk is the risk that rivals enter once demand grows, eroding the prices and volumes on which the appraisal rested. Project-specific risk arises from the project's own technology, nature or location, marketing risk from selling larger output in wider markets, and exchange risk from currency moves. (a) is wrong: Project-specific risk comes from the project's own technology, nature or location. (b) is wrong: Marketing risk comes from moving output into wider markets. (c) is wrong: No foreign currency is involved.
Question 2 of 5
How does the Hillier model allow for a project's risk?
Why (d): Hillier discounts the expected cash flows at the risk-free rate and expresses risk separately, as the standard deviation of NPV derived from the cash flows' deviations. Raising the rate is the risk-adjusted discount rate method; scaling flows down is the certainty equivalent method. (a) is wrong: That is the risk-adjusted discount rate method. (b) is wrong: That is the certainty equivalent method. (c) is wrong: That is the payback approach to risk.
Question 3 of 5
In a decision tree, what does a branch represent?
Why (b): The textbook says a branch represents a decision, which is an alternative course of action. (a) is wrong: That is shown by the node. (c) is wrong: The final NPV is the result of evaluation. (d) is wrong: Rates are not branches.
Question 4 of 5
What does the certainty equivalent method put in place of each uncertain cash flow?
Why (d): The method replaces each risky flow with the amount that is equivalent to certainty for the decision maker, reflecting the attitude to risk. (a) is wrong: An average still carries risk. (b) is wrong: That would ignore risk. (c) is wrong: The worst case is not the certainty equivalent.
Question 5 of 5
At what rate are certainty equivalent cash flows discounted?
Why (a): In the textbook's formula, Rf, the risk-free rate, functions as the cost of capital, since the risk has already been taken out of the cash flows. (b) is wrong: The cost of capital includes a risk premium. (c) is wrong: That would count risk twice. (d) is wrong: Inflation is not the discount rate here.
0 of 5 answered.
Traps in this unit
A single-point NPV hides risk; test it.
A 10% rise in a 10% rate is 11%, not 20%.
A higher investment also raises depreciation.
Practise all 138 questions on Unit 11. The free CAIIB demo opens Units 1–2 of every paper with full explanations; the ABFM Online Mock Centre unlocks all 4,000+ ABFM questions, the full-length papers with caselets and key-ins, module mocks and Smart Revision for 18 months (₹1,499).
Independent study aid — not affiliated with, endorsed by, or sponsored by the Indian Institute of Banking & Finance (IIBF). Exam pattern, dates, fees and passing criteria are set by IIBF — always confirm the current rules at iibf.org.in. CAIIB content follows rules and developments up to IIBF's cut-off of 30 June 2026 (where a rule changed later, the update box says so); verify from official sources before relying on them in practice.