Page 139 - DMGT409Basic Financial Management

Basic Financial Management

Notes 7.6 Self Assessment

Fill in the blanks:

1. Fixed assets represent ....................... and ....................... elements.

2. ....................... is the firm’s decision to invest its current funds most efficiently in the long-

term assets in anticipation of an expected flow of benefits over a series of years.

3. Capital budgeting decisions are ....................... without ....................... .
4. Capital budgeting evaluation techniques are divided into ....................... broad categories.
5. Traditional techniques of capital budgeting evaluation is also known as ....................... .
6. Pay back period and Accounting rate of return methods are ....................... .
7. Modern techniques are also known as ....................... .

8. Discounted cash flow techniques are subdivided into ....................... .

9. Net present value (NPV), ......................., and profi tability index are three discounted cash
fl ow techniques.

10. Profitability index technique is also known as ....................... .

State whether the following statements are true or false:
11. Capital budgeting is a short-term decision.
12. CFAT is the base for computation of pay back period.

13. When cash flows after taxes are unequal then cumulative cash flow method is used to
compute pay back period.

14. Intermediate cash flows are reinvested at the rate of IRR is the assumption of IRR.
15. Additional working capital required is not added to the cost of the project when evaluation
is based on DCF techniques.
16. Additional, scrap value and cost of project are the components of average investment.
17. NPV and IRR both, are DCF methods.
18. If there is a size disparity the NPV and IRR will give different rankings.

7.7 Review Questions

1. A project requires an investment of `100,000. It is expected t yield an annual cash fl ow after
taxes of ` 20,000 for 10 years. Calculate payback period.
2. ABC company is planning to buy an equipment, that had two alternatives A and B. Each
equipment requires an initial investment of ` 30,000. From the following additional
information you are required to calculate payback period and suggest which equipment
should be preferred? why?
Years 1 2 3 4 5
A(`) 10,500 8,000 6,000 7,500 12,000
CFAT
B(`) 3,000 6,000 8,000 12,000 80,000

3. An equipment costs ` 10,00,000 and it is expected to yield a profit after depreciation but
before loss is ` 150,000. Depreciation rate is 10 per cent on straight-line method, and
company’s tax rate is 50 per cent, calculate the pay back period.

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