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Advanced Capital Budgeting Decisions

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Questions and Answers

What is the formula for annual after-tax cash inflow of a project?

(R – C) (1 – T) - D

(R + C – D) (1 – T) + D

(R – C – D) (1 – T) + D (correct)

(R – C) (1 + T) + D

How does inflation affect the actual rate of return?

It has no effect on the actual rate of return

It reduces the actual rate of return (correct)

It increases the actual rate of return

It stabilizes the actual rate of return

What is the real net cash flow after deflating for an inflation rate of 10%?

` 32,000

` 27,513

` 29,091 (correct)

` 30,000

What is the formula for the required rate of return in nominal terms accounting for inflation?

RN = RR + P (D) Signup and view all the answers

How does the cost of capital considered for investment appraisals change with anticipated inflation?

It increases (D) Signup and view all the answers

In practice, investment projects are exposed to various types of factors. Which of the following is NOT one of these factors?

Stability of exchange rates (A) Signup and view all the answers

Which of the following is NOT an assumption made while discussing capital budgeting or investment evaluation techniques at intermediate level?

Inflation will not impact the project revenues and costs (B) Signup and view all the answers

What is the main reason for adjusting for inflation in capital investment appraisal?

To maintain the project cash flows at constant value (C) Signup and view all the answers

What is the necessity for incorporating risk in capital budgeting?

To account for uncertainties in the project's cash flows (A) Signup and view all the answers

Why is it important to consider change in technology as a factor impacting investment projects?

To adapt to new market demands and competition (D) Signup and view all the answers