Capital Budgeting Techniques

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?

Tk.8,000 (C) Signup and view all the answers

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

10% (A) Signup and view all the answers

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

Determining the time it takes to recover the initial investment (C) Signup and view all the answers

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

It ignores the cash flows beyond the payback period (D) 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?

Accept the project (D) Signup and view all the answers

What is the payback period for Project A?

2.4 years (C) Signup and view all the answers

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

To set a maximum time period for recovering the initial investment (B) Signup and view all the answers

What is capital budgeting primarily concerned with?

Investment decisions involving fixed assets (C) Signup and view all the answers

What is the payback period defined as?

The length of time required to recover the original investment (A) Signup and view all the answers

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

Fixed assets used in production (C) Signup and view all the answers

What is the primary goal of capital budgeting?

To analyze projects and decide which are acceptable (A) Signup and view all the answers

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

The cumulative value of cash flows until the initial investment is recovered (A) Signup and view all the answers

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

It considers the time value of money (A) Signup and view all the answers

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

It ignores cash flows beyond a certain point (C) Signup and view all the answers

What is the goal of the capital budgeting process?

To create value for the shareholders (C) Signup and view all the answers

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

It creates value for the shareholders (C) Signup and view all the answers

What is the discounted payback period a measure of?

The length of time until the sum of discounted cash flows is equal to the initial investment (B) 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?

To solve for the internal rate of return of a project using the interpolation method (A) 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)?

The firm would be indifferent to the project (D) Signup and view all the answers

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

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

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

To find the lower discount rate and higher discount rate for the interpolation method (B) 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)?

Accept the project (A) Signup and view all the answers

What does a zero NPV signify?

The project's cash flow is just sufficient to repay the investment capital and to provide the required rate of return on that capital. (D) Signup and view all the answers

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

The firm's value will improve. (D) Signup and view all the answers

What is the formula for computing NPV?

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

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

The rate of return required by the firm to invest in the project. (B) Signup and view all the answers

What is the decision criteria for NPV?

If NPV > 0, the project should be accepted. (D) Signup and view all the answers

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

To assess the financial viability of the project (B) Signup and view all the answers

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

Market research and analysis (B) Signup and view all the answers

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

To assess the sensitivity of the project's NPV to changes in variables (A) Signup and view all the answers

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

To assess the project's sensitivity to changes in cost and volume (D) Signup and view all the answers

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

National profitability or socio-economic benefits (C) Signup and view all the answers

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

To select the best project from a set of alternatives (B) Signup and view all the answers

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

Market Research and Analysis (D) 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?

To assess the project's financial requirements and funding options (C) 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?

Net socio-economic benefits (B) Signup and view all the answers

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

To assess the project's liquidity and working capital requirements (C) Signup and view all the answers