Capital budgeting is an important managerial activity. In this post, we’ll go through the top 25 Questions and Answers-Capital Budgeting.
If you read it from beginning to end, you will gain a basic understanding of capital budgeting. It will assist you in expanding your knowledge.
So let’s get started.
Questions and Answers-Capital Budgeting
Question-01: What is capital budgeting?
Answer: Capital budgeting is the process of identifying, evaluating, and choosing investment projects with long-term returns.
Question-02: What are the proposals or projects of capital budgeting?
Answer: The proposals or projects of capital budgeting are as follows:
- Replacement
- Expansion
- Diversification
- Research and Development
- Miscellaneous
Question-03: What are the proposals or projects according to their relative importance?
Answer: the proposals or projects according to their relative importance are as follows:
- Mutually Exclusive project
- Independent Single Project
- Contingent Project
- Capital Rationing
Question-04: What are the policies of capital budgeting?
Answer: The policies of capital budgeting are as follows:
- Estimating needs for investment
- Approval for projects or proposal
- Planning Horizon
Question-05: What is the importance of capital budgeting?
Answer: The importance of capital budgeting is as follows:
- Ensuring proper investment
- Balancing in long term investment
- Advance plan for securing fund
- Timely acquisition of assets and add to fixed assets
- Replacement of obsolete assets
Question-06: What are the limitations of Capital Budgeting?
Answer: The limitations of Capital Budgeting are as follows:
- Lack of sufficient data for investment proposals.
- Lack of dependability on collected data.
- Problem of determining the degree of risk.
- Personal Influence on analysis of the analyst.
Question-07: What are the elements related to capital budgeting decisions?
Answer: the elements related to capital budgeting decision are as follows:
- Provable investment proposals.
- Cost of proposals or projects
- Cash flow of projects
- Project Period
- Salvage value of the project
- Risk of the project
- Discount Rate
- Method of evaluation
Question-08: What is the process of capital budgeting?
Answer: The process of capital budgeting is as follows:
- Project Generation
- Project Evaluation
- Project Selection
- Project Execution
Question-09: What are the methods of evaluating capital expenditure or investment wroth?
Answer: the methods of evaluating capital expenditure or investment wroth are as follows:
i. Conventional Method:
- Payback period method
- Return on investment method
ii. Discounted Cash Flow Method:
- Net present Value Method
- Internal Rate of Return Method
iii. Profitability Index
iv. M.A.P.I. System
Question-10: What is the best method for evaluating capital expenditure?
Answer: Discounted cash flow method is the best method for evaluating capital expenditure.
Question-11: What is the Cash payback method?
Answer: The cash payback method determines the amount of time it would take to recover the cost of capital expenditure from the investment’s net annual cash flow.
Question-12: What are the advantages or benefits of the cash payback method?
Answer: the advantages or benefits of the cash payback method are as follows:
- This method is very simple and easy to understand.
- This method measures how quickly the capital invested in the project can be repaid from the profits earned in the project so that the decision can be made considering the risk factor.
Question-13: What are the disadvantages or limitations of Payback period method?
Answer: the disadvantages or limitations of Payback period method are as follows:
- The major disadvantage of this method is that it does not place much emphasis on the earning power of the project.
- It doesn’t consider the time value of money.
Question-14: What is the annual rate of return method?
Answer: Annual rate of return method determines the profitability of capital expenditure by dividing expected annual net income by the average investment.
Annual Rate of Return= Expected Annual Net Income/ Average Investment
Question-15: What is the cost of capital?
Answer: The rate of return that management expects to receive on both borrowed and equity funds is referred to as the cost of capital.
Question-16: What is discounted cash flow method?
Answer: Discounted cash flow method considers both the estimated total net cash flows from the investment and the time value of money.
Question-17: What is the internal rate of return (IRR)?
Answer: The rate at which the present value of the proposed capital expenditure equals the present value of the estimated net annual cash flows is known as the internal rate of return (IRR).
Question-18: What is the internal rate of return (IRR) method?
Answer: Internal rate of return (IRR) method is the method that finds the interest yield of the potential investment.
Question-19: What is the Net present value (NPV)?
Answer: When the initial capital outlay is subtracted from the discounted net cash flows, the difference is known as the net present value (NPV).
Question-20: What is Net present value (NPV) method?
Answer: The net present value (NPV) method involves discounting net cash flows to their present value and then comparing the present value to the investment’s capital outlay.
Question-21: What are the advantages or benefits of Net present value (NPV) method?
Answer: The advantages or benefits of Net present value (NPV) method are as follows:
- The investment is profitable as the net present value system considers the time value of money and converts the future earnings of the project to the present value.
- In this method the entire periodical income of the project is considered.
- This method is reasonable and reliable.
Question-22: What are the disadvantages or limitations of Net present value (NPV) method?
Answer: The disadvantages or limitations of Net present value (NPV) method are as follows:
- The use of this method is not easy for the common man. It is a bit more complicated than other methods.
- Many people think that determining the present value of earnings is unnecessary and difficult.
Question-23: What is the required rate of return?
Answer: Required rate of return is the rate that is generally based on the company’s cost of capital.
Question-24: What is the Profitability Index?
Answer: This method calculates the present value of the project’s cash flow and divides this present value by the present value of the net investment to determine the profitability index.
Question-25: When is the M.A.P.I system used?
Answer: This method is usually used to evaluate low capital projects and to decide on the replacement of old machines.
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