List – I List – II (a) IRR (i) Process of analyzing potential fixed asset investment. (b) NPV is equal to zero. (ii) (Proportion of equity) × (cost of equity) + (Proportion of debt) × (cost of debts). (c) Cost of capital (iii) Project is acceptable. (d) Capital budgeting (iv) NPV = Zero.
Codes :
IRR Definition and Match
IRR (Internal Rate of Return) is correctly matched with (iv) NPV = Zero.
Reasoning: The IRR is the discount rate that makes the Net Present Value (NPV) of a project equal to zero. This is a fundamental definition in investment appraisal.
NPV Zero Significance Match
A situation where NPV is equal to zero is matched with (iii) Project is acceptable.
Reasoning: When NPV = 0, the project's expected return equals the required rate of return (cost of capital), indicating it meets the minimum criteria for acceptance.
Cost of Capital Calculation Match
Cost of capital is matched with (ii) (Proportion of equity) × (cost of equity) + (Proportion of debt) × (cost of debts).
Reasoning: This represents the weighted average cost of capital (WACC), calculated by summing the product of each financing component's proportion and its cost.
Capital Budgeting Process Match
Capital budgeting is matched with (i) Process of analyzing potential fixed asset investment.
Reasoning: Capital budgeting refers to the planning and management process for evaluating potential long-term investments, such as those involving fixed assets.
Summary of Matches:
- (a) IRR - (iv) NPV = Zero
- (b) NPV is equal to zero - (iii) Project is acceptable
- (c) Cost of capital - (ii) (Proportion of equity) × (cost of equity) + (Proportion of debt) × (cost of debts)
- (d) Capital budgeting - (i) Process of analyzing potential fixed asset investment
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 :
