CAPITAL BUDGETING
(INCLUDING CAPITAL BUDGETING UNDER RISK)
CHAPTER 5
Review Questions...
A. OBJECTIVE TYPE AND MULTIPLE CHOICE QUESTIONS (1 MARK QUESTIONS)
1. Write proper word/words in the blank:
(i) Capital budgeting is also known as _______and _______
(ii) Capital Investment decisions are generally of _______ nature.
(iii) Profitability index is also known as _______ ratio.
(iv) The simplest capital budgeting technique is _______
(v) Net Present Value of Inflows is calculated by deducting _______ from the total ______
[Ans- (i) Investment Decision Making, Planning Capital Expenditure (ii) Irreversible (iii) Benefit/cost (iv) Pay-back Period Method. (v) Cost of Investment, present values of cash inflows.]
2. State whether the following statements are true of false.
(i) Pay back period method measure the true profitability of a project.
(ii) Internal Rate of Return and Time Adjusted Rate of Return are the same.
(iii) Capital rationing and capital budgeting mean the same thing.
(iv) Rate of Return method takes into account the time value of money.
(v) Net present value method take account the earnings over the entire life of the project.
[Ans- (i) False, (ii) True, (iii) False, (iv) False, (v) True]
3. Select the most appropriate answer:
(i) Which is not pay-back method ?
(a) Pay-off Method
(b) Payout Method
(c) Recoupment Period Method
(d) None
(ii) Capital budgeting deals with:
(a) Cash management
(b) Management of working capital
(c) Managing fixed assets
(d) None of the above
(iii) A project has investment of ₹ 1,20,000 and yields annual cash inflow of ₹ 12,222 for 12 years. Find out pay back period.
(a) 15 years.
(b) 10 Years
(c) 19 Years
(d) None
(iv) When a project should be accepted under Profitability Index (P.I.)
(a) When PI > 1.0
(b) When PI < 1.0
(c) When PI = 0
(d) None of the above
[Ans- (i) (d); (ii) (c); (iii) (b); (iv) (a) ]
4. Select the most appropriate answer:
(i) Accept reject decisions in capital budgeting relate to:
(a) Independent Projects.
(b) Proposals which compete with one another.
(c) Proposals which compete for limited funds.
(ii) Time value of money is considered in :
(a) Pay-back period method.
(b) Accounting rate of return method.
(c) Discounted cash flow method.
(iii) NPV stands for:
(a) Net profitability value
(b) net present value
(c) net purchase value
[Ans- (i) (a); (ii) (c); (iii) (b)]
B. SHORT ANSWER TYPE QUESTIONS (2 MARKS QUESTIONS )
1. Define capital budgeting.
Ans-
2. Explain the term capital budgeting in 2-3 sentences.
Ans-
3. What do you mean by accounting rate of return.
Ans-
4. What is payback period?
Ans-
5. Explain the tern net present value in 2-3 sentences.
Ans-
6. What is IRR?
Ans-
7. What is capital rationing?
Ans-
8. What do you understand by capital budgeting?
Ans-
9. Write any three features which distinguish capital budgeting decision from the ordinary day-to-day business decisions.
Ans-
10. What are the three types of cash flows for investment decisions?
Ans-
11. What is the need of capital budgeting?
Ans-
12. Name various methods of capital budgeting.
Ans-
13. Write a note on capital budgeting process.
Ans-
14. What are the limitations of capital budgeting?
Ans-
15. Write a short note on net present value as a technique of capital budgeting.
Ans-
16. Write a brief note on NPV vs. IRR.
Ans-
17. What are the kinds of capital budgeting decisions?
Ans-
18. What is risk-adjusted discount rate?
Ans-
19. What do you understand by certainty equivalent approach?
Ans-
20. What is certainty equivalent approach?
Ans-
21. What is meant by risk-adjusted discount rate?
Ans-
C. LONG ANSWER TYPE QUESTIONS
1. What is capital budgeting? Examine its need and importance.
Ans-
2. Explain the concept of capital budgeting and what is its practical utility?
Ans-
3. What is capital budgeting? What is it significant for a firm?
Ans-
4. Explain the nature and concept of capital budgeting.
Ans-
5. Briefly present the principles of capital budgeting.
Ans-
6. Elucidate the capital budgeting process.
Ans-
7. Give a comparative description of various methods of ranking investment proposals.
Ans-
8. What are the principle methods employed for ascertaining the profitability of a capital expenditure project? Write short notes on any two methods.
Ans-
9. Explain briefly the following methods of capital budgeting bringing out the advantages and disadvantages of each:
(a) Pay-back period method
(b) Accounting Rate of Return Method
10. Give a comparative description of net present value method and internal rate of return method.
Ans-
11. Are there any considerations other than profitability of be made in managerial decisions about investment proposals? Explain these.
Ans-
12. ''Capital budgeting is long-term planning for making and financing proposed capital outlays''. Explain. What are the limitations of capital budgeting?
Ans-
13. What do you understand by capital budgeting process? Enumerate briefly the major steps involved in capital budgeting.
Ans-
14. Write short notes on:
(a) Profitability Index;
(b) Time -adjusted rate of return;
(c) Capital rationing.
Ans-
15. ''For most investment decisions that a firm daces, net present value is either a superior decisions criterion, or is at least as good as the competing techniques.'' In what investment situations is the profitability index better than the net present value?
Ans-
16. Under what circumstances may NPV and IRR give conflicting recommendations? Which criteria should be followed in such circumstances and why?
Ans-
17. Do the NPV and PI always lead to the same investment decisions ? Discuss.
Ans-
Questions Type By- Janmoni hazarika
Post ID: DABP002237
