Capital Budgeting Techniques
40 Questions
0 Views
3.3 Stars

Capital Budgeting Techniques

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.

Created by
@StunnedVoice

Questions and Answers

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?

<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

More Quizzes Like This

Use Quizgecko on...
Browser
Browser