From the following techniques of capital budgeting decision, indicate the correct combination of discounting techniques : I. Profitability index II. Net present value III. Accounting rate of return IV. Internal rate of return Codes :
Understanding Capital Budgeting Techniques
Capital budgeting involves evaluating potential investments or projects. Discounting techniques are methods that consider the time value of money, meaning a dollar today is worth more than a dollar in the future. These techniques adjust future cash flows to their present value.
Identifying Discounting Techniques
Let's analyze each technique mentioned:
- I. Profitability Index (PI): This technique compares the present value of future expected cash flows to the initial investment. It inherently uses discounting.
- II. Net Present Value (NPV): NPV calculates the difference between the present value of cash inflows and the present value of cash outflows over a period. It is a core discounting technique.
- III. Accounting Rate of Return (ARR): ARR is calculated based on average accounting profit (Revenue - Expenses) divided by the average investment. It does not discount future cash flows and ignores the time value of money, making it non-discounting.
- IV. Internal Rate of Return (IRR): IRR is the discount rate at which the NPV of a project equals zero. Finding this rate requires discounting future cash flows.
Correct Combination of Discounting Techniques
Based on the analysis, the techniques that incorporate discounting are Profitability Index (I), Net Present Value (II), and Internal Rate of Return (IV).
Therefore, the correct combination is I, II, and IV.
Important Questions from Capital budgeting decisions
Zero Based Budgeting (ZBB) lays emphasis on:
A. Allocation of resources based on cost-benefit terms
B. Unlimited deficit financing
C. Preparing a new budget right from the scratch
D. Preparing the budget, neglecting the history of expenditure
Choose the correct answer from the options given below:
Under which of the following situations the decision outcome on evaluation of investment opportunities vary under NPV and IRR methods per se?
a) Time disparity
b) Cost disparity
c) Life disparity
d) Volume disparity
Choose the correct combination of situations:
Which one of the following methods of Capital Budgeting assumes that cash-inflows are reinvested at the project’s rate of return ?
Which of the following variables is not known in Internal Rate of Return methods of capital budgeting?
Indicate the correct code for discounted cash flow techniques for capital investment proposals from the following:
(i) Net Present Value Method
(ii) Internal Rate of Return method
(iii) Excess Benefit-Cost Ratio method
(iv) Net Terminal Value method
Choose the correct answer from the code given below :
