Capital Budgeting

What is the Payback Period in capital budgeting?

• The Payback Period is the internal rate of return of a project

• The Payback Period in capital budgeting is the time it takes for a project to recoup its initial investment.

• The Payback Period is the total revenue generated by a project

• The Payback Period is the net present value of a project

Define Internal Rate of Return (IRR) and its significance in investment decisions.

• IRR is the rate at which interest is compounded annually

• IRR is only applicable to short-term investments

• IRR is the discount rate that equates the present value of cash inflows with the present value of cash outflows. It helps in determining the potential return of an investment and comparing it with the required rate of return.

• IRR is the total cash inflow from an investment

What is the Profitability Index (PI) and how is it calculated?

• PI = Operating Income / Initial Investment

• PI = Present Value of Future Cash Flows / Initial Investment

• PI = Net Income / Initial Investment

• PI = Total Revenue / Initial Investment

Explain the concept of Capital Rationing in capital budgeting.

• Capital rationing allows a company to invest in all projects without any constraints

• Capital rationing in capital budgeting refers to the situation where a company has limited funds available for investment projects, requiring the selection of the most profitable projects within the budget constraints.

• Capital rationing refers to unlimited funds available for investment projects

• Capital rationing is not related to budget constraints in capital budgeting

What are the different investment decision criteria used in capital budgeting?

• Return on Investment (ROI),

• Payback period, Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index, Accounting Rate of Return

• Discounted Cash Flow (DCF),

• Earnings Before Interest and Taxes (EBIT),

In what situations would a company implement Capital Rationing?

• Unlimited funds and need to prioritize projects due to budget surplus

• Limited funds and need to prioritize projects due to budget constraints.

• Limited funds but no need to prioritize projects

• Unlimited funds and no need to prioritize projects

The net present value of an investment at 12% is $24,000, and at 20% is –$8,000. What is the internal rate of return of this investment?

State your answer to the nearest whole percent.

• 17%

• 18%

• 19%

• 20%

Although it ignores the time value of money, what is the most common method used in practice for capital budgeting?

• internal rate of return

• net present value

• payback

• accounting rate of return

A set of projects in which the acceptance of one project means that the others cannot be accepted

• Replacement Decision

• Expansion Decision

• Independent Projects

• Mutually Exclusive Projects

An independent project should be accepted if it

• produces a net present value that is greater than or equal to zero.

• produces a net present value that is greater than the equivalent IRR.

• has only one sign reversal.

• produces a profitability index greater than or equal to zero.