40 Questions
What is the minimum IRR required for a project to be acceptable?
Greater than the firm’s cost of capital
What is the expected annual earnings before depreciation and taxes of the new milling machine?
Tk.2,00,000
What is the cost of capital for Khaleque's company?
12%
What is the expected annual reduction in labor costs due to the new machine for the plastic manufacturing company?
Tk.8,000
What is the primary focus of capital budgeting in a firm?
Investment decisions involving fixed assets
What is the required after-tax return on investment for the plastic manufacturing company?
10%
What is the payback period in capital budgeting?
The length of time required to recover the original investment
What is the purpose of capital budgeting in a firm?
To analyze and decide on acceptable projects
What is the term 'capital' referring to in capital budgeting?
The fixed assets used in production
How is the payback period calculated in capital budgeting?
By adding up the expected cash flows until the cumulative value is equal to the total amount initially invested
What is the primary decision rule for the Payback Period Method?
If PBP < the standard period, accept the project
What is the major limitation of the Payback Period Method?
It ignores the time value of money
What is the purpose of the Payback Period Method?
To evaluate the feasibility of a project
What is the formula to calculate the exact period of the Payback Period?
Years before full recovery + Uncovered cost at start of full recovery year / Total cash flow during full recovery year
What is the result of the Payback Period calculation for Project A?
2.4 years
What is the primary advantage of discounted payback period over ordinary payback period?
It considers the time value of money.
What is the main drawback of the discounted payback period rule?
It ignores cash flows beyond a certain point.
What is the primary goal of the capital budgeting process?
To create value for shareholders.
What does a positive net present value (NPV) indicate?
The investment will create value.
What is the discounted payback period a measure of?
The time until the sum of discounted cash flows is equal to the initial investment.
What does an NPV of zero signify about a project's cash flow?
The project's cash flow is just sufficient to repay the investment capital and to provide the required rate of return
What is the decision criterion for NPV?
If NPV > 0, the project should be accepted
What does the rate of return 'k' represent in the NPV equation?
The rate of return required by the firm to invest in the project
What is the effect on a firm's value if a project has a positive NPV?
The firm's value will be improved
What is the purpose of using NPV in capital budgeting?
To value an investment by discounting its future cash flows
What is the primary goal of financial appraisal in a project?
To evaluate the financial viability of the project
Which of the following is NOT a part of financial appraisal?
Market research and analysis
What is the purpose of finding the IRR in capital budgeting?
To decide whether to accept or reject a project
What is the purpose of sensitivity analysis in financial appraisal?
To analyze how changes in variables affect the project's outcome
What is the discount rate that makes the NPV of a project equal to zero?
Internal Rate of Return (IRR)
What is an important consideration in evaluating the financial viability of a project?
Adequate provision for working capital requirements
If the IRR of a project is 15%, and the cost of capital is 12%, what should the firm do?
Accept the project
What is the formula to calculate the IRR using the trial and error method?
IRR = LDR + (NPV @ LDR x (HDR - LDR))
Which of the following is a key aspect of capital budgeting techniques?
Option appraisal
What is the decision criterion if the IRR is equal to the cost of capital?
The firm would be indifferent to the project
What is the primary focus of socio-economic appraisal?
Socio-economic benefits
What is a key consideration in evaluating a project's financial viability?
The project's cash flow
What is the purpose of preparing projected financial statements?
To forecast the project's future performance
What is an important aspect of financial appraisal in infrastructure projects?
Socio-economic benefits
What is a key consideration in evaluating a project's financing?
The project's capital structure
Learn about the process of planning expenditures on assets whose cash flows extend beyond one year. Understand the investment decision involving fixed assets of a firm. Test your knowledge on capital budgeting techniques.
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