Match List - I with List - II : Choose the correct answer from the options given below :List - I (Methods) List - II (Description) A. Net present value I. Ratio of PV of inflows to investment B. Internal rate of return II. Rate where NPV = 0 C. Profitability index III. Present value of inflows – Present value of outflow D. Payback period IV. Time to recover initial cost
Matching Financial Appraisal Methods and Descriptions
This question requires matching specific financial appraisal methods (List - I) with their correct descriptions (List - II). Understanding these methods is crucial for evaluating investment opportunities.
Net Present Value (NPV) Definition
Net Present Value (NPV) is a method used to determine the current value of a future stream of cash flows. It calculates the difference between the present value of cash inflows and the present value of cash outflows over a period. A positive NPV indicates that the projected earnings are more than anticipated, suggesting a potentially profitable investment. The formula is generally represented as:
$$ NPV = \sum_{t=0}^{n} \frac{C_t}{(1+r)^t} $$
Where $C_t$ is the net cash flow at time $t$, $r$ is the discount rate, and $n$ is the total number of periods. This definition corresponds to: III. Present value of inflows – Present value of outflow.
Internal Rate of Return (IRR) Definition
The Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. It is the discount rate at which the Net Present Value (NPV) of all the cash flows (both positive and negative) from a particular project equals zero. In simpler terms, it's the break-even rate of return. This definition corresponds to: II. Rate where NPV = 0.
Profitability Index (PI) Definition
The Profitability Index (PI), also known as the value investment ratio (VIR), is a profitability ratio that measures the ratio between the present value of future cash flows and the initial investment required. A PI greater than 1.0 indicates that the project is expected to generate value. The formula is:
$$ PI = \frac{\text{Present Value of Future Cash Flows}}{\text{Initial Investment}} $$
This definition corresponds to: I. Ratio of PV of inflows to investment.
Payback Period Definition
The Payback Period is a capital budgeting technique that calculates the amount of time required for an investment's cumulative cash inflows to equal its initial cost. It's a measure of how quickly an investment can be recouped. A shorter payback period is generally preferred. This definition corresponds to: IV. Time to recover initial cost.
Correct Matching Summary
Based on the definitions, the correct matching is as follows:
| List - I (Methods) | List - II (Description) |
| A. Net present value | III. Present value of inflows – Present value of outflow |
| B. Internal rate of return | II. Rate where NPV = 0 |
| C. Profitability index | I. Ratio of PV of inflows to investment |
| D. Payback period | IV. Time to recover initial cost |
Therefore, the correct option is A-III, B-II, C-I, D-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:
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 :
Break even analysis is also known as:
- Arrange the process of capital budgeting in proper sequence.
A. Identification of potential investment opportunities
B. Decision making
C. Assembling of proposed investments
D. Preparation of capital budget and appropriation
E. Implementation
Choose the correct answer from the options given below : - When NPV and IRR give different rankings, which of the following problem is the cause of disparity that arises when the initial investment in mutually exclusive projects is different ?
