0000028240 00000 n Return on investment can be analyzed by a number of ratios in general. Now it is easy to find the duration of time required to recover the initial investment of 255,000. It is one of the most important Techniques of Capital Budgeting in which discounting is made. Multiple choice questions (MCQs) rojielyn . The correct answer is “the project returns 75 cents in present value for each dollar invested in it” (option 4). Another important point that needs to be clarified is that the internal rate of return is quite different from the discounting rate that is employed in the NPV calculation. Reply. 0000021844 00000 n 0000014980 00000 n The external sources arc mainly the issue of shares and debentures to the public. The main objective of capital budgeting is to those projects that can increase the value of the organization. The selected data is given below: If equipment is depreciated using straight line method, what is the depreciation tax shield associated with the new equipment? The project with the highest profitability index is the most desirable project. Capital budgeting involves mainly three problems: 1. 0000018668 00000 n 0000015088 00000 n Capital is a scarce resource and is therefore, it has a cost. 0000015688 00000 n TOS4. Fixed assets are that portion of balance sheets which are long term in nature. Thus, as a source of capital funds, plough back policy forms an integral part of capital budgeting. Following is the data provided in the example. CAPITAL BUDGETING PROBLEMS: CHAPTER 10 Data for NPV Profiles NPV Discount Rate A B 0% $45,000 $25,000 13% $3,655 2,755 14.6% 0 — 15.2% — 0 Intersection—approximately 14% If cost of capital is above 14%, conflicting rankings occur. The correct answer is “4 years” (option 3). Your answer is incorrect. Your answer is incorrect. 0000027949 00000 n How To Make Communication Within Your Organisation Much More Effective? 0000007325 00000 n There is also another estimate which is discount factor. 0000025751 00000 n 0000029134 00000 n The Washington Company has gathered the following data on a proposed investment: Based on the above information, the accounting/simple rate of return is: Accounting/simple rate of return = (incremental revenue – incremental expenses)/Initial cost 0000007936 00000 n As cash flow is the result of all flows, its degradation is a symptom of a malfunction that needs … [Read More...], Change Management Model: A change is a change from a previous situation. The current worth of a sum of money to be received at a future date is called: Your answer is incorrect. 0000024395 00000 n Generally these estimates are confined to one year or two years. 0000026181 00000 n The correct answer is “$180,000” (option 3). World’s Largest Collection of Essays! 0000009082 00000 n 1. a. Compute the (i) net present value and (ii) internal rate of return of the following capital budgeting projects. The net present value of four projects is given below: The four projects given above require the same amount of investment. The cost of capital sets the minimum rate that the investment must promise to return. 0000007893 00000 n Survey of explicit capital requirements generally, confined to one year or two years at the most. A project whose acceptance requires the acceptance of another project is known as: Your answer is incorrect. %PDF-1.3 %âãÏÓ 0000024075 00000 n Capital Budgeting Techniques Solutions . 0000019189 00000 n 0000030487 00000 n The same equation is used in the calculation of Internal Rate of Return that is used in the calculation of NPV. Let’s take the above café example in which there is initial investment of $ 255,000, the expected per month profit in the first year is 15,000 whereas the expected per month profit in the second year is $ 25,000. Because formula for calculating cash payback period doesnt include discount rate. 0000011293 00000 n P9-11. Fixed assets are that portion of balance sheets which are long term in nature. In question 9, the discount rate has been ignored because we do not take into account the time value of money while computing simple payback period. The correct answer is “Simple cash payback method” (option 2). Payback period = investement/cash inflow. Visit us to find here free business notes of all the subjects of B.com, M.com, BBA & MBA online. Payback period = investement/cash inflow, Copyright 2012 - 2020.

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