Which of the following is not true with reference to capital budgeting ?
Existing investment in a project is not treated as sunk cost.
Capital budgeting is the process of evaluating long-term investment proposals using incremental, future cash flows and the time value of money. Each statement is judged against these principles.
Asset replacement decisions: true. Deciding whether to replace an old machine with a new one is a classic capital budgeting decision, along with expansion and new-project decisions.
Cost of capital equals the minimum required return: true. The cost of capital is the cut-off rate that a project must earn to leave the value of the firm unchanged, so it is the minimum acceptable rate of return.
Existing investment not treated as sunk cost: not true. Money already spent on a project cannot be recovered whether the project goes ahead or not, so it is a sunk cost and is ignored; only future incremental cash flows are relevant.
Timing of cash flows is relevant: true. Because of the time value of money, a rupee received earlier is worth more than a rupee received later, which is why discounted techniques such as NPV and IRR are preferred.
So the only false statement is the one saying that existing investment is not treated as sunk cost.
Hence, the answer is Existing investment in a project is not treated as sunk cost..
Similar Questions
Which of the following techniques for appraisal of investment proposals are based on time value of money ?
(a) Accounting Rate of Return
(b) Internal Rate of Return
(c) Profitability Index Method
(d) Earnings Per Share
Codes :
In certainty equivalent approach, adjusted cash flows are discounted at :
In capital budgeting, the term capital rationing implies :
Interim cash inflows are reinvested at a rate of return equal to the internal rate of return is the built-in-mechanism for
Assertion (A) : When two or more investment proposals are mutually exclusive, ranking the proposals on the basis of IRR, NPV and PI methods may give contradictory results.
Reason (R) : The contradictory results in the ranking are due to differing dimensions relating to the scale of investments, cash flow patterns and project lives.
Indicate the correct answer :
Codes :
Match the items of the following two lists and suggest the correct code :
List – I List – II a. Pay-back Rate of Return i. Discounted Cash Flow Technique b. Internal Rate of Return ii. Compounded values of investments and returns c. Benefit Cost Ratio iii. Crude method for project evaluation d. Net Terminal Value Method iv. Varying sized projects evaluation Codes :
a b c d
Formula for net cash inflow of a project is :
Important Questions from Capital budgeting decisions
- Under which one of the following situation a firm can not raise capital for a project under any circumstance ?
- Which of the following statement about Finance lease is NOT true ?
(i) Finance lease transfer substantially all the risks and rewards incidental to ownership of an asset.
(ii) The lease period in a finance lease covers a substantial portion of the asset's economic life.
(iii) Payment towards lease rental in finance lease cover all cast incurred by lessor in obtaining the assets.
(iv) Finance lease is considered short-term in nature. - Assertion (A): Compounding interest allows an investment to grow faster over time compared to simple interest.
Reason (R): Simple interest earns interest on Previously earned interest. Which of the following variables is not known in Internal Rate of Return methods of capital budgeting?
- As per the Union Budget 2022, how many crore has been made to cover 3.8 crore households in 2022-23 under Har Ghar, Nal Se Jal Scheme?
