A. Net Present Value
B. Benefit- cost Ratio
C. Accounting Rate of Return
D. Internal Rate of Return
E. Payback Period
Choose the correct answer from the options given below:
Capital Budgeting Techniques Using Discounting
The question asks to identify capital budgeting techniques that employ the discounting criteria. Discounting involves adjusting future cash flows to their present value, considering the time value of money. This is crucial for accurate investment appraisal.
Analysis of Techniques
- Net Present Value (NPV): NPV calculates the present value of future cash inflows minus the present value of cash outflows. It explicitly uses a discount rate, thus following the discounting criteria. The formula involves summing discounted cash flows:
$ NPV = \sum_{t=0}^{n} \frac{CF_t}{(1+r)^t} - Initial Investment $
- Benefit-Cost Ratio (BCR): Also known as the Profitability Index, BCR compares the present value of benefits (cash inflows) to the present value of costs (cash outflows). It requires discounting future cash flows.
$ BCR = \frac{\sum_{t=1}^{n} \frac{CF_{in,t}}{(1+r)^t}}{\sum_{t=0}^{n} \frac{CF_{out,t}}{(1+r)^t}} $
- Accounting Rate of Return (ARR): ARR is calculated using average accounting profits (based on accrual accounting) divided by the average investment. It does not consider the time value of money or discount cash flows.
$ ARR = \frac{\text{Average Annual Profit}}{\text{Average Investment}} \times 100\% $
- Internal Rate of Return (IRR): IRR is the discount rate at which the NPV of a project equals zero. Calculating IRR inherently involves the concept of discounting future cash flows.
- Payback Period: This technique measures the time required to recover the initial investment from the project's cumulative cash flows. It typically uses undiscounted cash flows and ignores cash flows beyond the payback point.
Conclusion
Based on the analysis, Net Present Value (A), Benefit-Cost Ratio (B), and Internal Rate of Return (D) follow the discounting criteria. Accounting Rate of Return (C) and Payback Period (E) do not.
Therefore, the correct combination is A, B, and D.
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 :
