Match the List-I with List-II
LIST I
ConceptLIST II
MeaningA. Profitability Index I. Rate that equates the investment outlay with the present value of cash inflow received after one period B. Accounting Rate of Return (ARR) II. Compound average annual rate that is calculated with a reinvestment rate different than the project's IRR C. Internal Rate of Return (IRR) III. Rate that is computed by dividing the average profit after tax with the average investment D. Modified Internal Rate of Return (MIRR) IV. Ratio of the present value of cash inflows, at the required rate of return, to the initial cash outflow of the investment
Choose the correct answer from the options given below:
Solution: Matching Financial Concepts
The question asks to match financial concepts in List I with their corresponding meanings in List II. This involves understanding the definitions of Profitability Index (PI), Accounting Rate of Return (ARR), Internal Rate of Return (IRR), and Modified Internal Rate of Return (MIRR).
A. Profitability Index (PI) - Meaning IV
The Profitability Index (PI) measures the ratio between the present value of future cash inflows and the initial investment. It essentially represents the expected future value per unit of cost. This directly matches meaning IV: "Ratio of the present value of cash inflows, at the required rate of return, to the initial cash outflow of the investment".
B. Accounting Rate of Return (ARR) - Meaning III
The Accounting Rate of Return (ARR) is a profitability metric calculated using accounting profits, not cash flows. It is typically expressed as the average annual profit after tax divided by the initial or average investment. This corresponds to meaning III: "Rate that is computed by dividing the average profit after tax with the average investment".
C. Internal Rate of Return (IRR) - Meaning I
The Internal Rate of Return (IRR) is the discount rate at which the Net Present Value (NPV) of an investment becomes zero. It represents the effective rate of return generated by the investment. Meaning I, "Rate that equates the investment outlay with the present value of cash inflow received after one period", is the closest provided definition, signifying the point where investment cost equals the discounted value of returns.
D. Modified Internal Rate of Return (MIRR) - Meaning II
The Modified Internal Rate of Return (MIRR) addresses limitations of the IRR by incorporating a specific reinvestment rate for positive cash flows and a financing rate for negative cash flows. This provides a more realistic estimate. This aligns with meaning II: "Compound average annual rate that is calculated with a reinvestment rate different than the project's IRR".
Correct Matching
Based on the analysis:
- A matches with IV
- B matches with III
- C matches with I
- D matches with II
Therefore, the correct option is A- IV, B-III, C-I, D-II.
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 :
