8 Lecture
MGT201
Midterm & Final Term Short Notes
Capital budgeting and capital budgeting techniques
Capital budgeting is the process of making decisions about long-term investments in fixed assets or capital projects. It involves evaluating the potential profitability of investment opportunities and selecting those that will maximize sharehold
Important Mcq's
Midterm & Finalterm Prepration
Past papers included
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- Which of the following is a capital budgeting technique? a) Balance sheet analysis b) Income statement analysis c) Payback period d) Cash flow analysis
Answer: c) Payback period
- Which capital budgeting technique considers the time value of money? a) Payback period b) Internal rate of return c) Accounting rate of return d) Profitability index
Answer: b) Internal rate of return
- Which of the following is a disadvantage of the payback period method? a) It is easy to calculate b) It considers the time value of money c) It ignores cash flows beyond the payback period d) It is widely used by businesses
Answer: c) It ignores cash flows beyond the payback period
- The net present value (NPV) method uses which of the following to evaluate a project? a) Future cash inflows and outflows b) Accounting profits c) Depreciation expenses d) Market share
Answer: a) Future cash inflows and outflows
- Which of the following is an advantage of the internal rate of return (IRR) method? a) It considers all cash flows over the project's life b) It is easy to calculate c) It does not consider the time value of money d) It is not affected by changes in interest rates
Answer: a) It considers all cash flows over the project's life
- Which of the following is a disadvantage of the profitability index (PI) method? a) It is difficult to understand and calculate b) It is affected by changes in interest rates c) It ignores cash flows beyond the payback period d) It does not consider the time value of money
Answer: d) It does not consider the time value of money
- Which capital budgeting technique uses accounting profits to evaluate a project? a) Payback period b) Internal rate of return c) Accounting rate of return d) Net present value
Answer: c) Accounting rate of return
- Which of the following is a limitation of the net present value (NPV) method? a) It ignores the time value of money b) It does not consider all cash flows over the project's life c) It is difficult to understand and calculate d) It is not affected by changes in interest rates
Answer: c) It is difficult to understand and calculate
- Which of the following is a capital budgeting decision? a) Deciding on the marketing strategy for a new product b) Deciding on the salaries for employees c) Deciding on the purchase of new equipment d) Deciding on the price of a product
Answer: c) Deciding on the purchase of new equipment
- Which of the following is not a capital budgeting technique? a) Payback period b) Accounting rate of return c) Market share analysis d) Net present value
Answer: c) Market share analysis
Subjective Short Notes
Midterm & Finalterm Prepration
Past papers included
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What is capital budgeting? Answer: Capital budgeting is the process of evaluating and selecting long-term investment projects that will generate the highest returns for a business.
What is the difference between capital budgeting and operational budgeting? Answer: Capital budgeting focuses on long-term investment decisions while operational budgeting focuses on short-term decisions related to day-to-day operations.
What is the payback period method and what are its limitations? Answer: The payback period method is a capital budgeting technique that calculates the length of time it takes to recover the initial investment. Its limitations include ignoring cash flows beyond the payback period and not considering the time value of money.
What is the net present value (NPV) method and how is it calculated? Answer: The NPV method is a capital budgeting technique that calculates the present value of expected cash inflows minus the present value of expected cash outflows. It considers the time value of money and helps determine the profitability of a project.
What is the internal rate of return (IRR) method and how is it calculated? Answer: The IRR method is a capital budgeting technique that calculates the discount rate at which the present value of expected cash inflows equals the present value of expected cash outflows. It considers the time value of money and helps determine the rate of return of a project.
What is the profitability index (PI) method and how is it calculated? Answer: The PI method is a capital budgeting technique that calculates the ratio of the present value of expected cash inflows to the initial investment. It helps determine the profitability of a project relative to its cost.
What is the cost of capital and how is it determined? Answer: The cost of capital is the rate of return required by investors to invest in a project. It is determined by calculating the weighted average of the cost of debt and the cost of equity.
How can risk be incorporated into capital budgeting decisions? Answer: Risk can be incorporated by adjusting the discount rate used in capital budgeting techniques to reflect the riskiness of the project. A higher discount rate is used for riskier projects.
What is the difference between the net present value (NPV) and internal rate of return (IRR) methods? Answer: The NPV method calculates the present value of expected cash inflows minus the present value of expected cash outflows while the IRR method calculates the discount rate at which the present value of expected cash inflows equals the present value of expected cash outflows.
What are the advantages and disadvantages of the payback period method? Answer: The advantages of the payback period method include its simplicity and ease of use. The disadvantages include ignoring cash flows beyond the payback period and not considering the time value of money.