Knowledge On Preliminary Concepts In Capital Budgeting

1. Capital Budgeting is -

A sort of budget

Determination of long term investment project

Raising capital for a firm

Capital budgeting is a process, through which firms decide on their long term investments.

Explanation

Capital budgeting is a process, through which firms decide on their long term investments.

2. You are given three Projects – A, B & C.Suppose Project A has Pay Back Period (PBP) of 2 years, Project B has PBP of 3.5 years and Project C has PBP of 3 years. Which project shall you choose?

Project A

Project B

Project C

Project A is chosen, as it has the lowest Payback Period.

Explanation

Project A is chosen, as it has the lowest Payback Period.

3. If compounding occurs quarterly, then the amount to which money grows for an investment is -

Greater than the amount to which money grows for an investment that compounds annually

Less than the amount to which money grows for an investment that compounds annually

Equal to the amount to which money grows for an investment that compounds annually

Quarterly compounding means there are 4 compounding per year. The frequent the compounding occurs, the faster the money grows. So, quarterly compounding results in higher rise than annual compounding.

Explanation

Quarterly compounding means there are 4 compounding per year. The frequent the compounding occurs, the faster the money grows. So, quarterly compounding results in higher rise than annual compounding.

4. You are given three Projects – A, B & C. For Project A, Net Present Value (NPV) is $20,000; For Project B, NPV is $30,000; For Project C, NPV is $40,000. Which project shall you choose?

Project A

Project B

Project C

Project C has the highest NPV. So, this is chosen.

Explanation

Project C has the highest NPV. So, this is chosen.

5. You are given three Projects – A, B & C. Suppose Project A has Profitability Index (PI) of 2.14, Project B has PI of 3.25 and Project C has PI of 3.19. Which project shall you choose?

Project A

Project B

Project C

Project B has the highest Profitability Index. So, it is chosen.

Explanation

Project B has the highest Profitability Index. So, it is chosen.

6. Suppose interest rate is 10%. 4 years from now, you expect to receive $1000. What is it's discounted value to you at present?

$683.01

$826.45

$1000

Future Cash Flows are discounted by the interest rate using the formula: FV/(1+r)^n. Here, FV=$1000, r=10%, n=4. So, Present Value = 1000/1.1^4 = $683.01

Explanation

Future Cash Flows are discounted by the interest rate using the formula: FV/(1+r)^n. Here, FV=$1000, r=10%, n=4. So, Present Value = 1000/1.1^4 = $683.01

7. Suppose interest rate is 10% compounded annually and you are investing $1000 now. What amount of money your investment will grow in 4 years time?

$1331.00

$1464.10

$1400.00

After Year 1, $1000 becomes (at 10% interest): 1000 + 1000 x 10% = $1100
After Year 2: 1100 + 1100 x 10% = $1210
After Year 3: 1210 + 1210 x 10% = $1331
After Year 4: 1331 + 1331 x 10% = $1464.10

Explanation

After Year 1, $1000 becomes (at 10% interest): 1000 + 1000 x 10% = $1100
After Year 2: 1100 + 1100 x 10% = $1210
After Year 3: 1210 + 1210 x 10% = $1331
After Year 4: 1331 + 1331 x 10% = $1464.10

8. If a Project A has greater NPV than that for a Project B, then Project A has greater PBP than that for Project B. This statement is -

Always True

Always False

Not necessarily always True

NPV and PBP are two different capital budgeting methods, with different concepts. So, not necessarily NPV and PBP will always choose the same project as the best project.

Explanation

NPV and PBP are two different capital budgeting methods, with different concepts. So, not necessarily NPV and PBP will always choose the same project as the best project.

9. In the evaluation of projects, conflict occurs when -

NPV, PI, and PBP all select the same project as the best option

NPV, PI, and PBP select different projects as the best option

None of the above

Conflict means different capital budgeting approaches select different projects as the best option.

Explanation

Conflict means different capital budgeting approaches select different projects as the best option.

10. Money has a time value, means -

There is an interest rate, that discounts the value of future cash flows

Cash flow now is not equivalent to same amount of cash flow in future

Both of above

Increased interest rate causes decrease in the value of future money in present time. For this same reason, cash now is not equivalent to cash in later periods. Thus, money has time value.

Explanation

Increased interest rate causes decrease in the value of future money in present time. For this same reason, cash now is not equivalent to cash in later periods. Thus, money has time value.

Knowledge On Preliminary Concepts In Capital Budgeting

1. Capital Budgeting is -

2.

What first name or nickname would you like us to use?

2. You are given three Projects – A, B & C.Suppose Project A has Pay Back Period (PBP) of 2 years, Project B has PBP of 3.5 years and Project C has PBP of 3 years. Which project shall you choose?

3. If compounding occurs quarterly, then the amount to which money grows for an investment is -

4. You are given three Projects – A, B & C. For Project A, Net Present Value (NPV) is $20,000; For Project B, NPV is $30,000; For Project C, NPV is $40,000. Which project shall you choose?

5. You are given three Projects – A, B & C. Suppose Project A has Profitability Index (PI) of 2.14, Project B has PI of 3.25 and Project C has PI of 3.19. Which project shall you choose?

6. Suppose interest rate is 10%. 4 years from now, you expect to receive $1000. What is it's discounted value to you at present?

7. Suppose interest rate is 10% compounded annually and you are investing $1000 now. What amount of money your investment will grow in 4 years time?

8. If a Project A has greater NPV than that for a Project B, then Project A has greater PBP than that for Project B. This statement is -

9. In the evaluation of projects, conflict occurs when -

10. Money has a time value, means -