Capital Budgeting Techniques
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Capital Budgeting Techniques

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Questions and Answers

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

  • Equal to the firm’s cost of capital
  • Twice the firm’s cost of capital
  • Greater than the firm’s cost of capital (correct)
  • Less than the firm’s cost of capital

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

  • Tk.2,50,000
  • Tk.2,00,000 (correct)
  • Tk.1,00,000
  • Tk.1,50,000

    • What is the cost of capital for Khaleque's company?

  • 14%
  • 16%
  • 10%
  • 12% (correct)

    • What is the expected annual reduction in labor costs due to the new machine for the plastic manufacturing company?

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

    What is the primary focus of capital budgeting in a firm?

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

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

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

    What is the payback period in capital budgeting?

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

    What is the purpose of capital budgeting in a firm?

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

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

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

    How is the payback period calculated in capital budgeting?

    <p>By adding up the expected cash flows until the cumulative value is equal to the total amount initially invested</p> Signup and view all the answers

    What is the primary decision rule for the Payback Period Method?

    <p>If PBP &lt; the standard period, accept the project</p> Signup and view all the answers

    What is the major limitation of the Payback Period Method?

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

    What is the purpose of the Payback Period Method?

    <p>To evaluate the feasibility of a project</p> Signup and view all the answers

    What is the formula to calculate the exact period of the Payback Period?

    <p>Years before full recovery + Uncovered cost at start of full recovery year / Total cash flow during full recovery year</p> Signup and view all the answers

    What is the result of the Payback Period calculation for Project A?

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

    What is the primary advantage of discounted payback period over 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 primary goal of the capital budgeting process?

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

    What does a positive net present value (NPV) indicate?

    <p>The investment will create value.</p> Signup and view all the answers

    What is the discounted payback period a measure of?

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

    What does an NPV of zero signify about a project's cash flow?

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

    What is the decision criterion for NPV?

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

    What does the rate of return 'k' represent in the NPV equation?

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

    What is the effect on a firm's value if a project has a positive NPV?

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

    What is the purpose of using NPV in capital budgeting?

    <p>To value an investment by discounting its future cash flows</p> Signup and view all the answers

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

    <p>To evaluate 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 purpose of finding the IRR in capital budgeting?

    <p>To decide whether to accept or reject a project</p> Signup and view all the answers

    What is the purpose of sensitivity analysis in financial appraisal?

    <p>To analyze how changes in variables affect the project's outcome</p> Signup and view all the answers

    What is the discount rate that makes the NPV of a project equal to zero?

    <p>Internal Rate of Return (IRR)</p> Signup and view all the answers

    What is an important consideration in evaluating the financial viability of a project?

    <p>Adequate provision for working capital requirements</p> Signup and view all the answers

    If the IRR of a project is 15%, and the cost of capital is 12%, what should the firm do?

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

    What is the formula to calculate the IRR using the trial and error method?

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

    Which of the following is a key aspect of capital budgeting techniques?

    <p>Option appraisal</p> Signup and view all the answers

    What is the decision criterion if the IRR is equal to the cost of capital?

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

    What is the primary focus of socio-economic appraisal?

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

    What is a key consideration in evaluating a project's financial viability?

    <p>The project's cash flow</p> Signup and view all the answers

    What is the purpose of preparing projected financial statements?

    <p>To forecast the project's future performance</p> Signup and view all the answers

    What is an important aspect of financial appraisal in infrastructure projects?

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

    What is a key consideration in evaluating a project's financing?

    <p>The project's capital structure</p> Signup and view all the answers

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