Capital budgeting questions and answers pdf? (2024)

Capital budgeting questions and answers pdf?

What are the seven capital budgeting techniques? The seven techniques include net present value (NPV), internal rate of return (IRR), profitability index (PI), payback period, discounted payback period, modified internal rate of return (MIRR), and real options analysis.

What are the 7 capital budgeting techniques?

What are the seven capital budgeting techniques? The seven techniques include net present value (NPV), internal rate of return (IRR), profitability index (PI), payback period, discounted payback period, modified internal rate of return (MIRR), and real options analysis.

What are the 4 processes of capital budgeting?

The process of capital budgeting involves the steps like Identifying the potential projects, evaluating them, selecting and implementing the projects, and finally reviewing the performance for future considerations.

What is the simplest capital budgeting technique?

Payback analysis is the simplest form of capital budgeting analysis, but it's also the least accurate. It is still widely used because it's quick and can give managers a "back of the envelope" understanding of the real value of a proposed project.

Why is capital budgeting difficult?

However, there are several unique challenges to capital budgeting. First, capital budgets are often exclusively cost centers; they do not incur revenue during the project and must be funded from an outside source such as revenue from a different department.

How do you calculate cost of capital?

Cost of Debt + Cost of Equity = Overall Cost of Capital

This is the cost of capital that would be used to discount future cash flows from potential projects and other opportunities to estimate their net present value (NPV) and ability to generate value.

What is the best capital budgeting method?

Which of the capital budgeting methods is the best? NPV Method is the most preferred method for capital budgeting because it considers the cash flow in the tenure and the cash flow uncertainties through the cost of capital.

What are the 3 main general steps to a capital budgeting process?

The capital budgeting process consists of five steps:
  • 1.Identify and evaluate potential opportunities. ...
  • 2.Estimate operating and implementation costs. ...
  • 3.Estimate cash flow or benefit. ...
  • 4.Assess risk. ...
  • 5.Implement. ...
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What is the first step of capital budgeting?

Option D: The initial stage of capital budgeting begins with determining the investment proposals and checking their feasibility. The weighing of the cons and pros of a proposed investment is analyzed with the associated cost and benefits.

What is a capital budget example?

Capital budgeting is the process of evaluating long-term investments. Examples include the addition or replacement of a fixed asset, like machinery, or a large-scale project, such as buying real estate or another company.

What is PI in capital budgeting?

The Profitability Index (PI) measures the ratio between the present value of future cash flows and the initial investment. The index is a useful tool for ranking investment projects and showing the value created per unit of investment.

What are the 6 phases of capital budgeting?

The process of capital budgeting includes 6 essential steps and they are: identifying investment opportunities, gathering investment proposals, decision-making processes, capital budget preparations and appropriations, and implementation and review of performance.

What are limitations of capital budgeting?

Limitations of capital budgeting

Many estimates have to be used during this process, including the initial capital that will be required or the future income that will be generated. If these estimates are incorrect, then the business's performance might suffer at a later point in time.

What is the NPV method of capital budgeting?

Net present value (NPV) is used to calculate the current value of a future stream of payments from a company, project, or investment. To calculate NPV, you need to estimate the timing and amount of future cash flows and pick a discount rate equal to the minimum acceptable rate of return.

What two methods are used most often in capital budgeting?

The most commonly used methods for capital budgeting are the payback period, the net present value and an evaluation of the internal rate of return.

Which of the following is not true for capital budgeting?

It includes opportunity cost, actual cost, incremental and relevant cash flows. It does not include sunk costs.

What is the most complicated but most accurate form of capital budgeting?

Throughput Analysis

Throughout analysis is the most complicated and most accurate method of capital budgeting. It analyzes revenue and expenses across the entire organization, by assuming that all costs are operating expenses. It involves taking the revenue of an organization and subtracting all variable costs.

What is an example of failure in the capital budgeting process?

Overspending and underspending the capital budget: Some managers will spend their whole budget and claim the budget was not sufficient. Remember that capital budgeting is the process of allocating resources to the most efficient uses. Failure to consider investment alternatives.

What is the most critical step in the capital budgeting analysis?

Factors that complicate the analysis are sunk The most critical step in capital budgeting analysis is -Select- costs, opportunity costs, externalities, changes in net operating working capital, and salvage values.

What are the errors in capital budgeting decisions?

In capital budgeting, it's crucial to avoid common mistakes to make sound financial decisions. Key errors to steer clear of include neglecting the cost of capital, underestimating cash flow estimates, ignoring the time value of money, overlooking risk factors, and not considering strategic alignment.

What is leverage in simple words?

What is Leverage. What is leverage? It is when one uses borrowed funds (debt) for funding the acquisition of assets in the hopes that the income of the new asset or capital gain would surpass the cost of borrowing is known as financial leverage.

What is the formula for cost of funds?

Calculating the Cost of Funds

The cost of funds can be calculated by dividing the total interest expense by the average balance of funds over a specific period. For example, if a bank pays $50,000 in interest on deposits and has an average deposit balance of $1 million, the cost of funds would be 5%.

What does WACC stand for?

Weighted average cost of capital (WACC) represents a company's average after-tax cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt. As such, WACC is the average rate that a company expects to pay to finance its business.

What are the tools of capital budgeting?

5 Methods for Capital Budgeting
  • Internal Rate of Return. ...
  • Net Present Value. ...
  • Profitability Index. ...
  • Accounting Rate of Return. ...
  • Payback Period.

What is the payback period in capital budgeting?

The payback period in capital budgeting gives the number of years it takes for you to recover the cost of the investment. For example, if it takes 10 years for you to recover the cost of the investment, then the payback period is 10 years. The payback period is an easy method to calculate the return on investment.

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