Capital Budgeting Techniques
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Questions and Answers

What is the minimum required IRR for a project to be acceptable?

  • Opportunity cost
  • Above firm's cost of capital
  • Firm's cost of capital or opportunity cost (correct)
  • Firm's cost of capital

    • What is the expected annual earnings before depreciation and taxes of the new milling machine?

  • Tk.4,00,000
  • Tk.3,00,000
  • Tk.1,00,000
  • Tk.2,00,000 (correct)

    • What is the depreciation method that will be used if the tax law changes?

  • Accelerated depreciation
  • Three-year MACRS schedule
  • Eight-year straight-line depreciation
  • Five-year straight-line depreciation (correct)

    • What is the annual labor cost savings of the new machine in Case-2?

    <p>Tk.8,000</p> Signup and view all the answers

    What is the required after-tax return on investment of the plastic manufacturing company?

    <p>10%</p> Signup and view all the answers

    What is the primary focus of the payback period method in capital budgeting?

    <p>Determining the time it takes to recover the initial investment</p> Signup and view all the answers

    Which of the following is a limitation of the payback period method?

    <p>It ignores the cash flows beyond the payback period</p> Signup and view all the answers

    According to the payback period decision rule, what should be done if the payback period is less than the standard period?

    <p>Accept the project</p> Signup and view all the answers

    What is the payback period for Project A?

    <p>2.4 years</p> Signup and view all the answers

    What is the purpose of the standard period in the payback period decision rule?

    <p>To set a maximum time period for recovering the initial investment</p> Signup and view all the answers

    What is capital budgeting primarily concerned with?

    <p>Investment decisions involving fixed assets</p> Signup and view all the answers

    What is the payback period defined as?

    <p>The length of time required to recover the original investment</p> Signup and view all the answers

    What is the term 'capital' referring to in the context of capital budgeting?

    <p>Fixed assets used in production</p> Signup and view all the answers

    What is the primary goal of capital budgeting?

    <p>To analyze projects and decide which are acceptable</p> Signup and view all the answers

    What is computed to determine a project's payback period?

    <p>The cumulative value of cash flows until the initial investment is recovered</p> Signup and view all the answers

    What is the main advantage of the discounted payback period over the ordinary payback period?

    <p>It considers the time value of money</p> Signup and view all the answers

    What is the main drawback of the discounted payback period rule?

    <p>It ignores cash flows beyond a certain point</p> Signup and view all the answers

    What is the goal of the capital budgeting process?

    <p>To create value for the shareholders</p> Signup and view all the answers

    What does a positive net present value indicate about an investment?

    <p>It creates value for the shareholders</p> Signup and view all the answers

    What is the discounted payback period a measure of?

    <p>The length of time until the sum of discounted cash flows is equal to the initial investment</p> Signup and view all the answers

    What is the purpose of choosing a lower discount rate (LDR) and a higher discount rate (HDR) in the calculation of IRR?

    <p>To solve for the internal rate of return of a project using the interpolation method</p> Signup and view all the answers

    What is the decision criteria for a project if the IRR is equal to the cost of capital (k)?

    <p>The firm would be indifferent to the project</p> Signup and view all the answers

    What is the formula used to calculate the IRR of a project using the interpolation method?

    <p>IRR = LDR + NPV @ LDR × (HDR - LDR) / (NPV @ LDR - NPV @ HDR)</p> Signup and view all the answers

    What is the purpose of calculating the net present value (NPV) of a project at different discount rates?

    <p>To find the lower discount rate and higher discount rate for the interpolation method</p> Signup and view all the answers

    What should a company do if the IRR of a project is greater than the cost of capital (k)?

    <p>Accept the project</p> Signup and view all the answers

    What does a zero NPV signify?

    <p>The project's cash flow is just sufficient to repay the investment capital and to provide the required rate of return on that capital.</p> Signup and view all the answers

    What is the impact of a positive NPV on the firm's value?

    <p>The firm's value will improve.</p> Signup and view all the answers

    What is the formula for computing NPV?

    <p>NPV = CF1 / (1 + k) + CF2 / (1 + k)^2 + ... + CFn / (1 + k)^n - I0</p> Signup and view all the answers

    What does the rate of return required by the firm (k) represent?

    <p>The rate of return required by the firm to invest in the project.</p> Signup and view all the answers

    What is the decision criteria for NPV?

    <p>If NPV &gt; 0, the project should be accepted.</p> Signup and view all the answers

    What is the primary objective of financial appraisal in a project?

    <p>To assess the financial viability of the project</p> Signup and view all the answers

    Which of the following is NOT a part of financial appraisal?

    <p>Market research and analysis</p> Signup and view all the answers

    What is the main purpose of sensitivity analysis in financial appraisal?

    <p>To assess the sensitivity of the project's NPV to changes in variables</p> Signup and view all the answers

    What is the primary focus of cost-volume-profit analysis in financial appraisal?

    <p>To assess the project's sensitivity to changes in cost and volume</p> Signup and view all the answers

    Which of the following is a socio-economic aspect of project evaluation?

    <p>National profitability or socio-economic benefits</p> Signup and view all the answers

    What is the primary focus of capital budgeting techniques in financial appraisal?

    <p>To select the best project from a set of alternatives</p> Signup and view all the answers

    Which of the following is NOT a part of financial projection in financial appraisal?

    <p>Market Research and Analysis</p> Signup and view all the answers

    What is the primary purpose of assessing the cost of the project and means of financing in financial appraisal?

    <p>To assess the project's financial requirements and funding options</p> Signup and view all the answers

    Which of the following is a consideration in evaluating the national profitability or socio-economic benefits of a project?

    <p>Net socio-economic benefits</p> Signup and view all the answers

    What is the primary focus of working capital requirement assessment in financial appraisal?

    <p>To assess the project's liquidity and working capital requirements</p> Signup and view all the answers

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