Capital Budgeting – Financial Management MCQ

Capital Budgeting – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Capital Budgeting – Financial Management MCQ

Question 1.
Capital budgeting is the process –
(A) which help to make master budget of the organization.
(B) By which the firm decides how much capital to invest in business
(C) by which the firm decides which long-term investments to make.
(D) undertaken to analyze how make available various finance to the business.
Answer:
(C) by which the firm decides which long-term investments to make.

Question 2.
The values of the future net incomes discounted by the cost of capital are called –
(A) Average capital cost
(B) Discounted capital cost
(C) Net capital cost
(D) Net present values
Answer:
(D) Net present values

Question 3.
The decision to accept or reject a capital budgeting project depends on –
(A) an analysis of the cash flows generated by the project
(B) cost of capital that are invested in business/project.
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 4.
The Internal Rate of Return (IRR) criterion for project acceptance, under theoretically infinite funds is:
Accept all projects which have –
(A) IRR equal to the cost of capital
(B) IRR greater than the cost of capital
(C) IRR less than the cost of capital
(D) None of the above
Answer:
(B) IRR greater than the cost of capital

Question 5.
…………… is a project whose cash flows are not affected by the accept/reject decision for other projects.
(A) Mutually exclusive project
(B) Independent project
(C) Low cost project
(D) Risk free project
Answer:
(B) Independent project

Question 6.
Where capital availability is unlimited and the projects are not mutually exclusive, for the same cost of capital, following criterion is used?
(A) Net present value
(B) Internal Rate of Return
(C) Profitability Index
(D) Any of the above
Answer:
(D) Any of the above

Question 7.
………………. is the discount rate which should be used in capital budgeting.
(A) Cost of capital (K_o)
(B) Risk free rate (R_f)
(C) Risk premium (R_m)
(D) Beta rate (β)
Answer:
(A) Cost of capital (K_o)

Question 8.
Which of the following represents the amount of time that it takes for a capital budgeting project to recover its initial cost?
(A) Maturity period
(B) Payback period
(C) Redemption period
(D) Investment period
Answer:
(B) Payback period

Question 9.
Incorporating flotation costs into the analysis of a project will:
(A) have no effect on the present value of the project.
(B) increase the NPV of the project.
(C) increase the project’s rate of return.
(D) increase the initial cash outflow of the project.
Answer:
(D) increase the initial cash outflow of the project.

Question 10.
A project is accepted when:
(A) Net present value is greater than zero
(B) Internal Rate of Return will be greater than cost of capital
(C) Profitability index will be greater than unity
(D) Any of the above
Answer:
(D) Any of the above

Question 11.
When choosing among mutually exclusive projects, the project with –
(A) Longest payback is preferred
(B) Higher NPV get selected
(C) Quickest payback is preferred
(D) Lower cost of capital will be selected
Answer:
(C) Quickest payback is preferred

Question 12.
With limited finance and a number of project proposals at hand, select that package of projects which has:
(A) The maximum net present value
(B) Internal rate of return is greater than cost of capital
(C) Profitability index is greater than unity
(D) Any of the above
Answer:
(A) The maximum net present value

Question 13.
Statement I:
In case of capital rationing, a company is compelled to invest in projects having shortest payback period.
Statement II:
The shorter the payback period, the less risky is the project. Therefore, it can be considered as an indicator of risk.
Select the correct answer from the options given below:
(A) Statement I is true but Statement II is false.
(B) Statement II is true but Statement I: is false.
(C) Both Statement I and Statement II are false.
(D) Both Statement I and Statement II are true.
Answer:
(D) Both Statement I and Statement II are true.

Question 14.
A Profitability Index (PI) of 0.92 for a ……….. project means that
(A) the project’s costs (cash outlay) are ?
(is) less than the present value of the project’s benefits.
(B) the project’s NPV is greater than zero.
(C) the project’s NPV is greater than 1.
(D) the project returns 92 cents in present value for each rupee invested.
Answer:
(D) the project returns 92 cents in present value for each rupee invested.

Question 15.
The shorter the payback period –
(A) the more risky is the project.
(B) the less risky is the project.
(C) less will the NPV of the project.
(D) more will the NPV of the project
Answer:
(B) the less risky is the project.

Question 16.
Which of the following statements is incorrect regarding a normal project?
(A) If the NPV of a project is greater than 0, then its PI will exceed 1.
(B) If the IRR of a project is 8%, its NPV, using a discount rate, K₀, greater than 8%, will be less than 0.
(C) If the Plot a project equals 0, then the project’s initial cash outflow equals the PV of its cash flows.
(D) If the IRR of a project is greater than the discount rate, K₀, then its PI will be greater than 1.
Answer:
(C) If the Plot a project equals 0, then the project’s initial cash outflow equals the PV of its cash flows.

Question 17.
Ranking projects according to their ability to repay quickly may be useful to firms:
(A) when experiencing liquidity constraints.
(B) when careful control over cash is required.
(C) to indicate the prospective investors specifying when their funds are likely to be repaid.
(D) All of the above
Answer:
(D) All of the above

Question 18.
Capital budgeting decisions are analyzed with help of weighted average and for this purpose –
(A) Component cost is used I
(B) Common stock value is used
(C) Cost of capital is used
(D) Asset valuation is used
Answer:
(C) Cost of capital is used

Question 19.
What is the difference between economic profit and accounting profit?
(A) Economic profit includes a charge for all providers of capital while accounting profit includes only a charge for debt.
(B) Economic profit covers the profit over the life of the firm, while accounting profit only covers the most recent accounting period.
(C) Accounting profit is based on current accepted accounting rules while economic profit is based on cash flows.
(D) All of the above are correct.
Answer:
(A) Economic profit includes a charge for all providers of capital while accounting profit includes only a charge for debt.

Question 20.
Which of the following is demerit of payback period?
(A) It is difficult to calculate as well as understand it as compared to accounting rate of return method.
(B) This method disregards the initial investment involved.
(C) It fails to take into account the timing of returns and the cost of capital.
(D) None of the above
Answer:
(C) It fails to take into account the timing of returns and the cost of capital.

Question 21.
A project whose acceptance does not prevent or require the acceptance of one or more alternative projects is referred to as
(A) Mutually exclusive project
(B) Independent project
(C) Dependent project
(D) Contingent project
Answer:
(B) Independent project

Question 22.
Which of the following is demerit of payback period?
(A) It does not indicate whether an investment should be accepted or rejected, unless the payback period is compared with an arbitrary managerial target.
(B) The method ignores cash generation beyond the payback period and this can be seen more a measure of liquidity than of profitability.
(C) This method makes no attempt to measure a percentage return on the capital invested and is often used in conjunction with other methods.
(D) All of the above
Answer:
(D) All of the above

Question 23.
When operating under a single-period capital-rationing constraint, you may first want to try selecting projects by descending order of their ……… in order to give yourself the best chance to select the mix of projects that adds most to firm value.
(A) Profitability Index (PI)
(B) Net Present Value (NPV)
(C) Internal Rate of Return (IRR)
(D) Payback Period (PBP)
Answer:
(A) Profitability Index (PI)

Question 24.
What is the idea behind project-specific required rates of return for a firm or division?
(A) Different projects should have different required rates of return because they are not alike with respect to risk.
(B) Each firm should have a different required rate of return because firms are not alike with respect to risk and have been created historically by projects taken that differ with regards to risk.
(C) A division of the firm will always have a required rate of return different from the firm’s overall weighted average cost of capital because the risk of the division always differs from that of the firm.
(D) All of the above
Answer:
(A) Different projects should have different required rates of return because they are not alike with respect to risk.

Question 25.
Which of the following statements is correct regarding the internal rate of return (IRR) method?
(A) Each project has a unique internal rate of return.
(B) As long as you are not dealing with mutually exclusive projects, capital rationing, or unusual projects having multiple sign changes in the cash-flow stream, the internal rate of return method can be used with reasonable confidence.
(C) The internal rate of return does not consider the time value of money.
(D) The internal rate of return is rarely used by firms today because of the ease at which net present value is calculated.
Answer:
(B) As long as you are not dealing with mutually exclusive projects, capital rationing, or unusual projects having multiple sign changes in the cash-flow stream, the internal rate of return method can be used with reasonable confidence.

Question 26.
Which of the following method of capital budgeting ignores the time value of money?
(A) Discounted payback period
(B) Net present value
(C) Internal rate of return
(D) None of the above
Answer:
(D) None of the above

Question 27.
Which of the following is not a potential for a ranking problem between two mutually exclusive projects?
(A) The projects have unequal lives that differ by several years.
(B) The costs of the two projects differ by nearly 30%.
(C) The two projects have cash flow patterns that differ dramatically.
(D) One of the mutually exclusive projects involves replacement while the other involves expansion.
Answer:
(D) One of the mutually exclusive projects involves replacement while the other involves expansion.

Question 28.
As per discounted payback period method, a project with –
(A) more discounted payback period will be selected.
(B) higher NPV will be preferred.
(C) low NPV will be preferred.
(D) less discounted payback period will be selected.
Answer:
(D) less discounted payback period will be selected.

Question 29.
A single, overall cost of capital is often used to evaluate projects because:
(A) it avoids the problem of computing the required rate of return for each investment proposal.
(B) it is the only way to measure a firm’s required return.
(C) it acknowledges that most new investment projects have about the same degree of risk.
(D) it acknowledges that most new investment projects offer about the same expected return.
Answer:
(A) it avoids the problem of computing the required rate of return for each investment proposal.

Question 30.
A project whose acceptance precludes the acceptance of one or more alternative projects is referred to as …………..
(A) Mutually exclusive project
(B) Independent project
(C) Dependent project
(D) Contingent project
Answer:
(A) Mutually exclusive project

Question 31.
The adjusted present value (APV) is best described as being
(A) equal to the discounted value of all cash flows after the discount rate is adjusted upward for additional risk
(B) equal to the discounted value of operating cash flows plus the present value of any tax-shield benefits less any flotation costs
(C) equal to the discounted value of operating cash flows plus the present value of any tax-shield
(D) benefits equal to the discounted value of operating cash flows less any flotation costs.
Answer:
(B) equal to the discounted value of operating cash flows plus the present value of any tax-shield benefits less any flotation costs

Question 32.
Which of the following is correct formula to calculate payback period reciprocal?
(A) (1/payback period) × 100
(B) (100/payback period) × 10
(C) (100/payback period) × β
(D) [(1/payback period) × β]÷ 100
Answer:
(A) (1/payback period) × 100

Question 33.
How ARR is calculated?
(A) (Average PAT/Initial Investment) × 100
(B) (Average NPV/Investment) × 100
(C) (Average PAT/Initial Investment) ÷ 100
(D) (Initial Investment/Average PAT) × 100
Answer:
(A) (Average PAT/Initial Investment) × 100

Question 34.
Some projects that a firm accepts will undoubtedly result in zero or negative returns. In light of this fact, it is best if the firm:
(A) Adjusts its hurdle rate (ie. cost of capital) upward to compensate for this fact.
(B) Adjusts its hurdle rate (ie. cost of capital) downward to compensate for this fact
(C) Does not adjust its hurdle rate up or down regardless of this fact
(D) Raises its prices to compensate for this fact.
Answer:
(C) Does not adjust its hurdle rate up or down regardless of this fact

Question 35.
If we add depreciation and other non cash expenses in profit after tax, the resulting figure is –
(A) Profit available for equity shareholder
(B) CFAT
(C) Net cash flow
(D) Free cash flow
Answer:
(B) CFAT

Question 36.
Lotus Corporation is trying to determine how to assign discount rates to the various projects proposed by its numerous international divisions. The company should put the greatest emphasis on which one of the following when assigning the discount rates?
(A) the geographic location where the project will be undertaken
(B) the currency exchange rate that will apply to the project
(C) the various types of risk associated with the project
(D) the experience of the managers of the division which is proposing the project
Answer:
(C) the various types of risk associated with the project

Question 37.
Which of the following is demer it of accounting rate of return (ARR) method?
(A) It does not take into accounting time value of money.
(B) It fails to measure properly the rates of return on a project even if the cash flows are even over the project life.
(C) It is biased against short-term projects in the same way that payback is biased against longer term ones.
(D) All of the above
Answer:
(D) All of the above

Question 38.
NPV = ?
(A) Project’s cash inflows minus the project’s cash outflows.
(B) Project’s cash inflows after tax minus the project’s cash outflows.
(C) Present value of the project’s cash inflows minus the present value of the project’s cash outflows.
(D) Present value of the project’s cash inflows minus the present value of the project’s cash outflows in initial year ignoring the present value of cash flows in subsequent years.
Answer:
(C) Present value of the project’s cash inflows minus the present value of the project’s cash outflows.

Question 39.
Lower standard deviation indicates –
(A) lower risk
(B) higher risk
(C) no risk at all
(D) highly favorable situation
Answer:
(A) lower risk

Question 40.
Consider following two statements.
I. The NPV decision rule specifies that all independent projects with a positive NPV should be accepted.
II. When choosing among mutually exclusive projects, the project with the largest (positive) NPV should be selected.
Select the true statement.
(A) I only
(B) Neither I nor II
(C) II only
(D) Both I and II
Answer:
(D) Both I and II

Question 41.
Which of the following statistical or mathematical technique of risk evaluation is used in capital budgeting?
(I) Certainty Equivalent Approach
(II) Standard Deviation
(III) Sensitivity Analysis
(IV) Probability Distribution Approach
Select the correct answer from the options given below –
(A) I only
(B) I and II only
(C) I, II and III only
(D) I, II, III and IV
Answer:
(D) I, II, III and IV

Question 42.
Which of the following statement is true in relation to NPV Method?
1. It considers the total benefits arising out of proposals over its lifetime.
2. It recognizes the time value of money.
3. It produces multiple rates, which can be confusing.
4. NPV can never be zero if cash flows are discounted by using risk free rate.
Select the correct answer from the options given below.
(A) 1 & 3
(B) 1,2 & 3
(C) 2,3 & 4
(D) 1 & 2
Answer:
(D) 1 & 2

Question 43.
………… is the ratio of assured cash flows to uncertain cash flows.
(A) Beta Factor (BF)
(B) Contingency Equivalent Factor
(C) Risk Premium Factor (RPF)
(D) Certainty Equivalent Factor (CEF)
Answer:
(D) Certainty Equivalent Factor (CEF)

Question 44.
……………. is an investment appraisal technique calculated by dividing the present value of future cash flows of a project by the initial investment required for the project.
(A) Indexed cost method
(B) Profitability index
(C) Cost benefit ratio
(D) Both (B) and (C)
Answer:
(D) Both (B) and (C)

Question 45.
Accept a project if the profitability index is:
(A) less than 1
(B) positive
(C) greater than 1
(D) negative
Answer:
(B) positive

Question 46.
Profitability index is actually a modification of the –
(A) Payback period method
(B) IRR Method
(C) Net present value method
(D) Risk premium method
Answer:
(C) Net present value method

Question 47.
………….. is a technique used to determine how different values of an independent variable impact a particular dependent variable under a given set of assumptions.
(A) Simulation Analysis
(B) Single Variable Analysis
(C) Sensitivity Analysis
(D) Sensex Analysis
Answer:
(C) Sensitivity Analysis

Question 48.
…………. of a capital budgeting project is the discount rate at which the Net Present Value (NPV) of a project equals zero.
(A) External Rate of Return (ERR)
(B) Risk Free Rate of Return (RFRR)
(C) Price Cost Method (PCM)
(D) Internal Rate of Return (IRR)
Answer:
(D) Internal Rate of Return (IRR)

Question 49.
Which of the following capital budgeting techniques takes into account the incremental accounting income rather than cash flows?
(A) Net present value
(B) Internal rate of return
(C) Accounting/simple rate of return
(D) Cash payback period
Answer:
(C) Accounting/simple rate of return

Question 50.
The IRR decision rule specifies that all independent projects –
(A) with positive NPV should be selected.
(B) with an IRR greater than the cost of capital should be accepted.
(C) having IRR greater economic value added should be selected.
(D) with an IRR greater than the cost of capital should be accepted though it have negative NPV.
Answer:
(B) with an IRR greater than the cost of capital should be accepted.

Question 51.
Which of the following techniques does not take into account the time value of money?
(A) Internal rate of return method
(B) Simple cash payback method
(C) Net present value method
(D) Discounted cash payback method
Answer:
(B) Simple cash payback method

Question 52.
If you are considering two projects namely, Project X & Project Y; NPV of the Project X is higher than Project Y but IRR of Project Y is greater than Project X then you will select –
(A) Project Y
(B) Project X
(C) Some other project
(D) None of the above
Answer:
(B) Project X

Question 53.
The current worth of a sum of money to be received at a future date is called:
(A) Real value
(B) Future value
(C) Present value
(D) Salvage value
Answer:
(C) Present value

Question 54.
The difference between the present value of cash inflows and the present value of cash outflows associated with a project is known as:
(A) Net present value of the project
(B) Net future value of the project
(C) Net historical value of the project
(D) Net salvage value of the project
Answer:
(A) Net present value of the project

Question 55.
Capital rationing refers to a situation –
(A) where a company cannot undertake projects as the cost of capital is less than required rate of return on projects.
(B) where company is confused in selection of more than one projects.
(C) where a company cannot undertake all positive NPV projects, it has identified because of shortage of capital.
(D) where cost of the projects is equal to present value leading NPV to zero.
Answer:
(C) where a company cannot undertake all positive NPV projects, it has identified because of shortage of capital.

Question 56.
If present value of cash outflow is equal to present value of cash inflow, the net present value will be:
(A) Positive
(B) Negative
(C) Zero
(D) Infinite
Answer:
(C) Zero

Question 57.
Generally, a project is considered acceptable if its net present value is:
(A) Negative or zero
(B) Negative or positive
(C) Positive or zero
(D) Negative
Answer:
(C) Positive or zero

Question 58.
An increase in the discount rate will:
(A) Reduce the present value of future cash flows.
(B) Increase the present value of future cash flows.
(C) Have no effect on net present value.
(D) Compensate for reduced risk.
Answer:
(A) Reduce the present value of future cash flows.

Question 59.
Using profitability index, the preference rule for ranking projects is:
(A) the lower the profitability index, the more desirable the project.
(B) the higher the profitability index, the more desirable the project.
(C) the lower the sunk cost, the more desirable the project.
(D) the higher the sunk cost, the more desirable the project.
Answer:
(B) the higher the profitability index, the more desirable the project.

Question 60.
A project whose cash flows are more than capital invested for rate of return then net present value will be
(A) Positive
(B) Independent
(C) Negative
(D) Zero
Answer:
(A) Positive

Question 61.
In mutually exclusive projects, project which is selected for comparison with others must have –
(A) Higher net present value
(B) Lower net present value
(C) Zero net present value
(D) All of the above
Answer:
(A) Higher net present value

Question 62.
Relationship between Economic Value Added (EVA) and Net Present Value (NPV) is considered as
(A) Valued relationship
(B) Economic relationship
(C) Direct relationship
(D) Inverse relationship
Answer:
(C) Direct relationship

Question 63.
In capital budgeting, positive net present value results in –
(A) Negative economic value added
(B) Positive economic value added
(C) Zero economic value added
(D) Percent economic value added
Answer:
(B) Positive economic value added

Question 64.
Cash inflows are revenues of project and are represented by –
(A) Hurdle number
(B) Relative number
(C) Negative numbers
(D) Positive numbers
Answer:
(D) Positive numbers

Question 65.
The process of planning expenditures that will influence the operation of a firm over a number of years is called –
(A) Investment
(B) Capital budgeting
(C) Net present valuation
(D) Dividend valuation
Answer:
(B) Capital budgeting

Question 66.
Which of the following is an example of a capital investment project?
(A) Replacement of worn-out equipment
(B) Expansion of production facilities
(C) Development of employee training programs
(D) All of the above are examples of capital investment projects.
Answer:
(D) All of the above are examples of capital investment projects.

Question 67.
The beta coefficient is associated with –
(A) Capital asset pricing model
(B) Dividend valuation model
(C) Risk-free rate plus premium model
(D) Tax-adjusted cost of debt
Answer:
(A) Capital asset pricing model

Question 68.
The term mutually exclusive investments mean:
(A) Choose only the best investments
(B) Selection of one investment pre-eludes the selection of an alternative
(C) The elite investment opportunities will get chosen.
(D) There are no investment options available.
Answer:
(B) Selection of one investment pre-eludes the selection of an alternative

Question 69.
Which method provides more confidence, the payback method or the net present value method?
(A) Payback because it provides a good timetable.
(B) Payback because it tells you when you break even.
(C) Net present value because it considers all inflows and outflows and the time value of money.
(D) Net present value because it does not need to use cost of capital.
Answer:
(C) Net present value because it considers all inflows and outflows and the time value of money.

Question 70.
To estimate an unknown number that lies between two known numbers is knows as –
(A) Capital rationing
(B) Capital budgeting
(C) Interpolation
(D) Amortization
Answer:
(C) Interpolation

Question 71.
Capital budgeting is the process of identifying analyzing and selecting investments project whose returns are expected to extend beyond –
(A) 3 years
(B) 2 years
(C) 1 year
(D) Months
Answer:
(C) 1 year

Question 72.
Indifference criteria whenBCR(Benifit Cost Ratio)?
(A) BCR > 1
(B) BCR = 1
(C) BCR < 1
(D) None of the above
Answer:
(B) BCR = 1

Question 73.
Criterion for IRR (Internal Rate of Return)?
(A) Accept, if IRR > Cost of capital
(B) Accept, if IRR < Cost of capital
(C) Accept, if IRR = Cost of capital
(D) None of the above
Answer:
(A) Accept, if IRR > Cost of capital

Question 74.
The categories of cash flows includes –
(A) Net initial investment
(B) Cash flow from operations after paying taxes
(C) Cash flow from terminal disposal after paying taxes
(D) All of the above
Answer:
(D) All of the above

Question 75.
The concept which explains that a money received in present time is more valuable than money received in future is classified as –
(A) Lead value of money
(B) Storage value of money
(C) Time value of money
(D) Cash value of money
Answer:
(C) Time value of money

Question 76.
The method which calculates the time to recoup initial investment of project in form of expected cash flows is classified as –
(A) Net value cash flow method
(B) Payback method
(C) Single cash flow method
(D) Lean cash flows method
Answer:
(B) Payback method

Question 77.
The rate of return to cover risk of investment and decrease in purchasing power as a result of inflation is classified as –
(A) Nominal rate of return
(B) Accrual accounting rate of return
(C) Real rate of return
(D) Required rate of return
Answer:
(A) Nominal rate of return

Question 78.
The payback period is multiplied to constant increase in yearly future cash flows to calculate –
(A) Cash value of money
(B) Net initial investment
(C) Net future value
(D) Time value of money
Answer:
(B) Net initial investment

Question 79.
The rate of return which is made up of risk free element and business risk element is classified as –
(A) Nominal rate of return
(B) Accrual accounting rate of return
(C) Real rate of return
(D) Required rate of return
Answer:
(C) Real rate of return

Question 80.
The project’s expected monetary loss or monetary gain by discounting all cash outflows and inflows using required rate of return is classified as –
(A) Net present value
(B) Net future value
(C) Net discounted value
(D) Net recorded cash value
Answer:
(A) Net present value

Question 81.
The decrease in purchasing power of any monetary unit such as euro, dollars etc. is classified as…
(A) Net investment parity
(B) Inflation
(C) Purchasing parity
(D) Buying parity
Answer:
(B) Inflation

Question 82.
When using the expected value criterion, it is assumed that the individual wants to
(A) Maximize return for a given level of risk
(B) Maximize return for maximum level of risk
(C) Maximize return irrespective of the level of risk
(D) All of the above
Answer:
(B) Maximize return for maximum level of risk

Question 83.
The profitability index may be used in investment decisions where capital rationing exists. In this context, when selecting investments for an optimal portfolio, the use of the profitability index is appropriate only where:
1. Projects are divisible.
2. Capital rationing occurs within a single investment period.
Which one of the following combinations (true/false) relating to the above statements is correct?

Answer:
(A)

Question 84.
Which of the following statements is true about mutually exclusive projects?
(A) They are not in direct competition with each other.
(B) They are in direct competition with each other.
(C) They are not evaluated based on shareholder wealth.
(D) They are never evaluated.
Answer:
(B) They are in direct competition with each other.

Question 85.
Why are projects with negative net present values (NPVs) unacceptable to a firm?
(A) Returns lower than the cost of capital result in firm failure.
(B) Returns with negative NPVs cause an equal profit ratio.
(C) Returns with negative NPVs are acceptable to a firm.
(D) Returns lower than the cost of capital result in higher profit ratios
Answer:
(A) Returns lower than the cost of capital result in firm failure.

Question 86.
Internal Rate of Return is defined as –
(A) The discount rate which causes the payback to equal one year.
(B) The discount rate which causes the NPV to equal zero.
(C) The ROE when the NPV equals 0.
(D) The ROE associated with project maximization.
Answer:
(B) The discount rate which causes the NPV to equal zero.

Question 87.
What are the two drawbacks associated with the payback period?
(A) The time value of money is ignored. It ignores cash flows beyond the payback period.
(B) The time value of money is considered. It ignores cash flows beyond the payback period.
(C) The time value of money is considered. It includes cash flows beyond the payback period.
(D) The time value of money is ignored. It includes cash flows beyond the payback period.
Answer:
(A) The time value of money is ignored. It ignores cash flows beyond the payback period.

Question 88.
Which of the following cash flows should not be considered relevant in calculating project cash flows?
(A) Opportunity costs
(B) Any effects caused by cannibalization
(C) Investments in net working capital as a result of making the investment
(D) Sunk costs
Answer:
(D) Sunk costs

Question 89.
Cash flows that should be considered for decision in hand are classified as –
(A) Relevant cash flows
(B) Irrelevant cash flows
(C) Marginal cash flows
(D) Transaction cash flows
Answer:
(A) Relevant cash flows

Question 90.
Nominal interest rates and nominal cash flows are usually reflected the –
(A) Inflation effects
(B) Opportunity effects
(C) Equity effects
(D) Debt effects
Answer:
(A) Inflation effects

Question 91.
In cash flow estimation and risk analysis, real rate will be equal to nominal rate if there is –
(A) No inflation
(B) High inflation
(C) No transactions
(D) No acceleration
Answer:
(A) No inflation

Question 92.
Real interest rate and real cash flows do not include –
(A) Equity effects
(B) Debt effects
(C) Inflation effects
(D) Opportunity effects
Answer:
(C) Inflation effects

Question 93.
Which of the following is not used in capital budgeting?
(A) Time value of money
(B) Sensitivity analysis
(C) Net assets method
(D) Cashflows
Answer:
(C) Net assets method

Question 94.
Which of the following is not incorporated in Capital Budgeting?
(A) Tax Effect
(B) Time Value of Money
(C) Required Rate of Return
(D) Rate of Cash Discount
Answer:
(D) Rate of Cash Discount

Question 95.
Which of the following is not applied in capital budgeting?
(A) Cash flows be calculated in incremental terms
(B) All costs and benefits are measured on cash basis
(C) All accrued costs and revenues be incorporated
(D) All benefits are measured on after tax basis.
Answer:
(C) All accrued costs and revenues be incorporated

Question 96.
A proposal is not a capital budgeting proposal if it:
(A) is related to Fixed Assets
(B) brings long-term benefits
(C) brings short-term benefits only
(D) has very large investment
Answer:
(C) brings short-term benefits only

Question 97.
Risk of a capital budgeting can be incorporated:
(A) Adjusting the Cash flows
(B) Adjusting the Discount Rate
(C) Adjusting the life
(D) All of the above
Answer:
(D) All of the above

Question 98.
In Certainty Equivalent Approach, the CE Factors for different years are:
(A) Generally increasing
(B) Generally decreasing
(C) Generally same
(D) None of the above
Answer:
(B) Generally decreasing

Question 99.
Which of the following is correct for Risk Adjusted Discount Rate (RADR)?
(A) Accept a project if NPV at RADR is negative
(B) Accept a project if IRR is more than RADR
(C) RADR is overall cost of capital plus risk-premium
(D) All of the above
Answer:
(C) RADR is overall cost of capital plus risk-premium

Question 100.
Expected Value of Cash flow, EVCF, is:
(A) Certain to occur
(B) Most likely cash flows
(C) Arithmetic average cash flow
(D) Geometric average cash flow
Answer:
(B) Most likely cash flows

Question 101.
Concept of joint probability is used in case of:
(A) Independent cash flows
(B) Uncertain cash flows
(C) Dependent cash flows
(D) Certain cash flows
Answer:
(C) Dependent cash flows

Question 102.
Decision-tree approach is used in:
(A) Proposals with longer life
(B) Sequential decisions
(C) Independent Cash flows
(D) Accept-Reject Proposal
Answer:
(B) Sequential decisions

Question 103.
Situation in which company replaces existing assets with new assets is classified as
(A) Replacement projects
(B) New projects
(C) Existing projects
(D) Internal projects
Answer:
(A) Replacement projects

Question 104.
The investment proposal with the greatest relative risk would have:
(A) Highest standard deviation of net present value.
(B) Highest coefficient of variation of net present value.
(C) Highest expected value of net present value.
(D) Lowest opportunity loss.
Answer:
(B) Highest coefficient of variation of net present value.

Question 105.
Probability-tree analysis is best used when cash flows are expected to be:
(A) Independent over time.
(B) Risk-free.
(C) Related to the cash flows in previous periods.
(D) Known with certainty.
Answer:
(C) Related to the cash flows in previous periods.

Question 106.
You are considering two mutually exclusive investment proposals, project A and project B. B’s expected value of net present value is $1,000 less than that for A and A has less dispersion. On the basis of risk and return, you would say that:
(A) Project A dominates project B.
(B) Project B dominates project A.
(C) Project A is more risky and should offer greater expected value.
(D) Each project is high on one variable, so the two are basically equal.
Answer:
(A) Project A dominates project B.

Question 107.
If two projects are completely independent (or unrelated), the measure of correlation between them is:
(A) 0
(B) 0.5
(C) 1.0
(D) -1.0
Answer:
(A) 0

Question 108.
Consider following two statements.
(I) Capital budgeting decisions are reversible in nature.
(II) An expansion decision is not a capital budgeting decision.
Select the correct answer from the options given below.

Answer:
(D)

Question 109.
Match List-I with List-II:

Select the correct answer from the options given below.

Answer:
(C)

Question 110.
Money Discount Rate is equal to:
(A) (1 + IR) × (1 + RDR) – 1
(B) (1 + IR) – (1 + RDR) -1
(C) (1 +RDR) – (1 + IR) -1
(D) (1 + RDR) + (1 + IR) -1
Answer:
(A) (1 + IR) × (1 + RDR) – 1

Question 111.
Real Discount Rate is equal to:
(A) (1 + IR) (1 + MDR) -1
(B) (1 + MDR) + (1 + IR) – 1
(C) (1 +MDR) ÷ (1 + IR) – 1
(D) (1 + MDR) – (1 + IR) – 1
Answer:
(C) (1 +MDR) ÷ (1 + IR) – 1

Question 112.
Consider following statements:
(1) Expected value of cash flows is equal to the arithmetic average of the cash flows.
(2) In case of capital budgeting, higher the standard deviation better the project is.
(3) In case of dependent cash flows, the risk is measured with reference to joint probabilities.
Select the correct statement.
(A) (1) False (2) False (3) False
(B) (1) False (2) True (3) True
(C) (1) True (2) True (3) False
(D) (1) False (2) False (3) True
Answer:
(D) (1) False (2) False (3) True

Question 113.
In the open-ended lease –
(A) The seller of an asset leases back the same asset from the purchaser.
(B) The lease arrangement is made immediately after the sale of the asset with the amount of the payments and the time period specified.
(C) The lessee has the option of purchasing the assets at the end of lease period.
(D) None of the above
Answer:
(C) The lessee has the option of purchasing the assets at the end of lease period.

Question 114.
Assume that a firm has accurately calculated the net cash flows relating to two mutually exclusive investment proposals. If the net present value of both proposals exceed zero and the firm is not under the constraint of capital rationing, then the firm should
(A) calculate the IRRs of these investments to be certain that the IRRs are greater than the cost of capital.
(B) compare the profitability index of these investments to those of other possible investments.
(C) calculate the payback periods to make certain that the initial cash outlays can be recovered within a appropriate period of time.
(D) accept the proposal that has the largest NP V since the goal of the firm is to maximize shareholder wealth and, since the projects are mutually exclusive, we can only take one.
Answer:
(D) accept the proposal that has the largest NP V since the goal of the firm is to maximize shareholder wealth and, since the projects are mutually exclusive, we can only take one.

Question 115.
Which of the following statements is correct regarding the risk-adjusted discount rate (RADR) approach?
(A) Under the RADR approach, we should accept a project if its net present value (NPV) calculated using a risk-adjusted discount rate is positive.
(B) Adjusting the firm’s overall cost of capital upward is required if the project or group are of higher than average risk.
(C) Under the RADR approach, we would still compare a project’s internal rate of return (IRR) to the firm’s overall weighted-average cost of capital in order to decide acceptance/rejection.
(D) Adjusting the firm’s overall cost of capital downward is required if the project or group are of lower than average risk.
Answer:
(A) Under the RADR approach, we should accept a project if its net present value (NPV) calculated using a risk-adjusted discount rate is positive.

Question 116.
Which one of the following projects – A, B, C or D – should be accepted? The expected return on the market is 16% and the risk-free rate is 6%.
(A) Project A, which has a beta of 0.50 and expected return of 11.2%.
(B) Project B, which has a beta of 2.50 and expected return of 25.4%.
(C) Project C, which has a beta of 1.25 and expected return of 18.2%.
(D) Project D, which has a beta of 1.00 and expected return of 15.8%.
Answer:
(A) Project A, which has a beta of 0.50 and expected return of 11.2%.

Question 117.
Damodhar is evaluating two conventional, independent capital budgeting projects (X & Y) by making use of the risk-adjusted discount rate (RADR) method of analysis. Projects X & Y have internal rates of return of 16% & 12%, respectively. RADR appropriate to Project X is 18%, while Project Y’sRADRisonly 10%. The company’s overall, weighted-average cost of capital is 14%. Damodhar should –
(A) Accept Project X and accept Project Y
(B) Accept Project X and reject Project Y
(C) Reject Project X and accept Project Y
(D) Reject Project X and reject Project Y
Answer:
(C) Reject Project X and accept Project Y

Question 118.
Two mutually exclusive projects are being considered. Neither project will be repeated again in the future after their current lives are complete. There-exists a potential problem though – the expected life of the first project is one year and the expected life of the second project is three years. This has caused the NPV and IRR methods to suggest different project preferences. What technique can be used to help make a better decision in this scenario?
(A) Rely on the NPV method and make your choice as it will tell you which one is best.
(B) Use the common-fife technique to replicate the one-year project three times and recalculate the NPV and IRR for the one-year project.
(C) Ignore the NPV technique and simply choose the highest IRR since managers are concerned about maximizing returns.
(D) In this situation, we need to rely on the profitability index (PI) method and choose the one with the highest PI.
Answer:
(A) Rely on the NPV method and make your choice as it will tell you which one is best.

Question 119.
In Certainty Equivalent Approach, the first step is to Convert uncertain cash flows to certain cash flows by multiplying it with the CE Factor and step two is –
(A) Discount the certain cash flows at the IRR to arrive at NP.
(B) Discount the certain cash flows at WACC rate to arrive at NP.
(C) Discount the certain cash flows at the risk free rate to arrive at NP.
(D) Discount the certain cash flows at the market rate of return to arrive at NP
Answer:
(C) Discount the certain cash flows at the risk free rate to arrive at NP.

Question 120.
Which of the following is correct formula to calculate risk-adjusted discount rate?

Answer:
(A)

Question 121.
You are considering two projects namely Project X and Project Y. Project X has low standard deviation but high coefficient of variation as compared to Project Y. Project Y has high standard deviation but low coefficient of variation as compared to Project X. Which project will you select?
(A) Project X only
(B) Both Project X & Project Y
(C) Neither Project nor & Project Y
(D) Project Y only
Answer:
(D) Project Y only

Question 122.
The coefficient of variation of net present value measures the ………
(A) Total risk of the project
(B) Relative risk of the project
(C) Highest expected value of net present value
(D) Market risk of the project
Answer:
(B) Relative risk of the project

Question 123.
Vayu’ Ltd. uses the Net Present Value (NPV) method, the Internal Rate of Return (IRR) method and Discounted Payback Period (DPP) to appraise its new investment. An investment opportunity was recently appraised using each of these methods and was estimated to provide a positive NPV of ₹ 1.5 million, an IRR of 15% and a DPP of 3 years. Later, it was discovered that the cost of capital of the company was lower than had been previously estimated. What would be the effect on the figures provided by each investment appraisal method of taking account of the lower cost of capital?

Answer:
(C)

Question 124.
A risk averse investor is considering four mutually exclusive investments, which have the following characteristics:

Which two of the above investments will the investor immediately reject?
(A) Alpha & Beta
(B) Alpha & Gamma
(C) Gamma & Delta
(D) Beta & Delta
Answer:
(C) Gamma & Delta

Question 125.
A approach to examining project risk occurs when the manager applies a probability distribution to factors such as market size, selling price, fixed and variable costs, and the useful life of the project. The manager then runs a computer program to determine the project worth by randomly selecting values for each variable, within the limits assigned. This is done numerous times to generate a complete risk-return analysis.
(A) Simulation
(B) Probability-tree
(C) Firm-portfolio
(D) Market risk
Answer:
(A) Simulation

Question 126.
A ……….. approach to examining project risk occurs when cash flows are arranged such that a cash flow in one period leads to several possible cash flow outcomes in the subsequent period. Each individual cash flow in the subsequent period then leads to several possible cash flow outcomes in its subsequent period. This process continues numerous times to generate a complete risk-return graphic.
(A) Simulation
(B) Probability-tree
(C) Firm-portfolio
(D) Market risk
Answer:
(B) Probability-tree

Question 127.
The probability in subsequent periods that is conditioned on what has occurred earlier is referred to as the –
(A) Initial probability
(B) Conditional probability
(C) Joint probability
(D) None of the above
Answer:
(B) Conditional probability

Question 128.
A firm that ignores risk differences (does not adjust for risk) when choosing new investment projects will generally –
(A) Reduce the overall risk of the firm overtime
(B) Not change the overall risk of the firm over time
(C) Increase the overall risk of the firm over time
(D) None of the above
Answer:
(C) Increase the overall risk of the firm over time

Question 129.
If two projects are completely and positively linearly dependent (or positively related), the measure of correlation between them is …………..
(A) 0
(B) +0.5
(C) +1
(D) -1
Answer:
(C) +1

Question 130.
The probability associated with the first portion of a complete branch of the probability tree is referred to as the……………..
(A) Initial probability
(B) Conditional probability
(C) Joint probability
(D) None of the above
Answer:
(A) Initial probability

Question 131.
The probability that a particular sequence of cash flows might occur is referred to as the………..
(A) Initial probability
(B) Conditional probability
(C) Joint probability
(D) None of the above
Answer:
(C) Joint probability

Question 132.
What technique is best used when cash flows are related to cash flows in previous periods?
(A) Cash flow analysis
(B) Risk aversion analysis
(C) Probability-tree analysis
(D) None of the above
Answer:
(C) Probability-tree analysis

Question 133.
When evaluating the risk and return of a project using the probability tree approach, what is the appropriate rate to discount each sequence of cash flows in the tree?
(A) Zero
(B) Risk-free rate
(C) Cost of capital
(D) Firm’s historical return on its stock
Answer:
(B) Risk-free rate

Question 134.
Consider the following two statements concerning finance leasing.
Statement I:
The lessor is responsible for the maintenance and servicing of the asset.
Statement II:
The period of the lease will cover all, or substantially all, of the useful economic life of the leased asset.
Select the correct answer from the options given below:

Answer:
(C)

Question 135.
Which of the following relate to finance leases as opposed to operating leases?
1. At the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.
2. Ownership of the asset remains with the lessor for the entire lease period.
3. Asset acquired under finance lease is shown as asset in the balance sheet of the lessee.
Select the correct answer from the options given below:
(A) 2 only
(B) 1 and 3 only
(C) 1 and 2 only
(D) 2 and 3 only
Answer:
(B) 1 and 3 only

Question 136.
AB Ltd. is considering either leasing an asset or borrowing to buy it, and is attempting to analyze the options by calculating the NPV of each. When comparing the two, AB Ltd. is uncertain whether they should include interest payments in their option to ‘borrow and buy’ as it is a future, incremental cash flow associated with that option. They are also uncertain which discount rate to use in the NPV calculation for the lease option. How should AB Ltd. treat the interest payments and what discount rate should they use?
Include interest — ₹ Discount Rate
(A) Yes — After tax cost of the loan if they borrow and buy
(B) Yes — AB Ltd.’s WACC
(C) No — After tax cost of the loan if they borrow and buy
(D) No — AB Ltd.’s WACC
Answer:
(C) No — After tax cost of the loan if they borrow and buy

Question 137.
Consider following two statements:
1. Risk analysis gives management better information about the possible outcomes that may occur so that management can use their judgment and experience to accept an investment or reject it.
2. In relation to capital budgeting, sensitivity analysis deals with the consideration of sensitivity of the NPV to different variables contributing to the NPV.
Select correct answer from the options given below:
(A) Both Statements are false
(B) Statement 1 is true while Statement 2 if false.
(C) Statement 2 is true while Statement 1 if false.
(D) Both Statements are true
Answer:
(D) Both Statements are true

Question 138.
Which of the following is advantage of sensitivity analysis?
(A) It compels the decision maker to identify the variables which affect the cash flow forecasts. This helps him in understanding the investment project in totality.
(B) It indicates the critical variables for which additional information may be obtained. The decision maker can consider actions which may help in strengthening the “weak spots” in the project
(C) It helps to expose inappropriate forecasts and thus guides the decision maker to concentrate on relevant variables.
(D) All of the above
Answer:
(D) All of the above

Question 139.
Which of the following is correct formula to calculate coefficient of variation?
(A) Standard deviation ÷ Expected NPV
(B) Standard deviation × Expected NPV
(C) Correlation × SD ÷ Expected NP
(D) None of the above
Answer:
(A) Standard deviation ÷ Expected NPV

Question 140.
Select odd one ……………
(A) Certainty Equivalent Approach
(B) Expected Net Present Value
(C) Simulation
(D) ARR
Answer:
(D) ARR

Question 141.
A project requires initial investment of ₹ 2,00,000 and estimated to generate cash flow after tax of ₹ 1,00,000,₹ 80,000, ₹ 40,000,₹ 20,000 &₹ 10,000 in next 5 years. What is the payback period of the project?
(A) 3 years and 4 months
(B) 2 years and 6 months
(C) 4 years and 2 months
(D) 2 years and 8 months
Answer:
(B) 2 years and 6 months

Question 142.
Y Ltd. is considering a project which requires initial investment of ₹ 6,75,000. Its cost of capital is 10%. Estimated cash flow after tax are as follows:
Year 1 — …………
Year 2 — 1,50,000
Year 3 — 6,60,000
Year 4 — 4,20,000
Year 5 — 4,20,000
What is projects discounted payback period?
(A) 3 years & 7.58 months
(B) 4 years & 4.12 months
(C) 3 years & 2.32 months
(D) 4 years & 8.11 months
Answer:
(C) 3 years & 2.32 months

Question 143.
Rakesh Ltd. is considering to invest in one of four projects for which an analyst has calculated ‘payback period reciprocal’ as 25%, 40%, 50% & 75% respectively for Project P, Q, R & S. Which project will be selected on ‘payback period’ method of capital budgeting?
(A) Project R
(B) Project P
(C) Project S
(D) Project Q
Answer:
(D) Project Q
Payback period reciprocal \(=\frac{1}{\text { Payback Period }} \times 100\)
Payback period of the Project P, Q, R & S project will be 4 years, 2.5 years, 2 years & 1.33 years. Since payback period of Project S is minimum; it will get selected.

Question 144.
Ramsey Ltd. wants to select one of machine out of two. Data for machines are given below:

Machine has to be written off over the period of 5 years by SLM.
The company will select –
(A) Machine A because its ARR is 15% while that of Machines B is 14%
(B) Machine B because it has higher average CFAT
(C) Machine A because it has higher average CFAT
(D) Machine B because its ARR is 16% while that of Machines A is 14%
Answer:
(D) Machine B because its ARR is 16% while that of Machines A is 14%

Question 145.
Following data is available for Project A whose initial investment is ₹ 50,000 and salvage value after 5 years is ₹ 3,750.

What is the NPV of the Project A if the Ke of the company is 10%? Ignore taxation.
(A) ₹ 5,710
(B) ₹ 6,690
(C) ₹ 6,800
(D) ₹ 7,216
Answer:
(B) ₹ 6,690

Question 146.
A Machine requires initial investment of ₹ 40,000 and expected to generate cash flow of ₹ 8,400,₹ 14,300 & ₹ 32,800 in next 3 years. Applicable tax rate is 30% and WACC of the company is 12%. The company will select machine because –
(A) It has positive NPV of ₹ 2,522
(B) It profitability index is 1.653 which is more than 1.
(C) Its IRR is between 14% to 15% which is more than WACC of the company.
(D) All of the above
Answer:
(C) Its IRR is between 14% to 15% which is more than WACC of the company.

Question 147.
Profitability index of Project ₹ is 1.20167 when its cash flow is discounted at 12%. Initial investment on project was ₹ 1,50,000. This project generates equal cash flow over the five years time. How much cash flow will be generated by the project each year?
(A) ₹ 50,000
(B) ₹ 40,000
(C) ₹ 60,500
(D) ₹ 40,897
Answer:
(A) ₹ 50,000

Question 148.
LMN Corporation is considering an investment that will cost ₹ 80,000 and have a useful life of 4 years. During the first 2 years, the net incremental after-tax cash flows are ₹ 25,000 per year and for the last 2 years they are ₹ 20,000 per year. What is the payback period for this investment?
(A) 3.2 year
(B) 3.5 year
(C) 4.0 year
(D) Cannot be determined with this information.
Answer:
(B) 3.5 year

Question 149.
Bhaskar Ltd. estimated that a proposed project’s 8-year net cash benefit will be ₹ 4,000 per year for years 1 to 8, with an additional terminal benefit of ₹ 8,000 at the end of the eighth year. Assuming that these cash inflows satisfy exactly required rate of return of 8 percent, the project’s initial cash outflow is closest to which of the following four possible answers?
(A) ₹ 27,308
(B) ₹ 25,149
(C) ₹ 14,851
(D) ₹ 40,000
Answer:
(A) ₹ 27,308

Question 150.
A project has the following cash inflows ₹ 34,444, ₹ 39,877, ₹ 25,000 & ₹ 52,800 for years 1 to 4, respectively. The initial cash outflow is ₹ 1,04,000. Which of the following four statements is correct concerning the project internal rate of return (IRR)?
(A) The IRR is less than 10%.
(B) The IRR is greater than 10%, but less than 14%.
(C) The IRR is greater than 14%, but less than 18%.
(D) The IRR is greater than or equal to 18%.
Answer:
(C) The IRR is greater than 14%, but less than 18%.

Question 151.
You must decide between two mutually exclusive projects.
Project X has cash flows of — ₹ 10,000, ₹ 5,000, ₹ 5,000 & ₹ 5,000, for years 0 through 3, respectively.
Project Y has cash flows of — ₹ 20,000, ₹ 10,000, ₹ 10,000 & ₹ 10,000; for years 0 through 3, respectively.
The firm has decided to assume that the appropriate cost of capital is 10% for both projects. Which project should be chosen? Why?
(A) X; Project X’s NPV > ProjectY’s NPV.
(B) X or Y; Makes no difference which you choose because the IRR for X is identical to the IRR for Y and both IRRs are greater than 10%, the cost of capital
(C) Y; Project Y’s NPV > Project X’s NPV
(D) Neither X nor Y; The NPVs of both projects are negative.
Answer:
(C) Y; Project Y’s NPV > Project X’s NPV

If you calculate R then it is same for both projects but when NPV and IRR gives conflicting results then NPV method is preferred and hence Project Y will be selected as its NPV is higher than Project X.

Question 152.
There are two mutually exclusive projects that have different lives. Project A has a 4-year life and Project B has a 5-year life. In replacement chain analysis, the earliest common life will occur when
Project A is replicated ………. times and
Project B is replicated ………. times.
(A) 5; 4
(B) 4; 5
(C) 20; 20
(D) Not possible to determine the answer
Answer:
(A) 5; 4

Question 153.
ABC Ltd. is considering investing in a project that costs ₹ 5,00,000 that will continue for next five years. The estimated salvage value is zero, tax rate is 35%. The company uses straight line depreciation for tax purposes and the proposed project has profit before charging depreciation of ₹ 2,20,000. Company’s cost of capital is 10%. What is the total present value for this project?
(A) ₹ 6,74,798
(B) ₹ 6,47,798
(C) ₹ 6,74,987
(D) ₹ 7,64,798
Answer:
(A) ₹ 6,74,798

Question 154.
ABC Ltd. is considering investing in a project that costs ₹ 5,00,000 that will continue for next five years. The estimated salvage value is zero, tax rate is 35%. The company uses straight line depreciation for tax purposes and the proposed project has profit before charging depreciation of ₹ 2,20,000. Company’s cost of capital is 10%. What is the Profitability Index of this project?
(A) 1.25
(B) 1.45
(C) 1.15
(D) 1.35
Answer:
(D) 1.35

Question 155.
ABC Ltd. is considering investing in a project that costs ₹ 5,00,000 that will continue for next five years. The estimated salvage value is zero, tax rate is 35%. The company uses straight line depreciation for tax purposes and the proposed project H has profit before charging depreciation of ₹ 2,20,000. Company’s cost of capital is 10%. What is the Payback Period of this project?
(A) 2.52 years
(B) 2.81 years
(C) 3.24 years
(D) 4.11 years
Answer:
(B) 2.81 years

Question 156.
ABC Ltd. is considering investing in a project that costs ₹ 5,00,000 that will continue for next five years. The estimated salvage value is zero, tax rate is 35%. The company uses straight line depreciation for tax purposes and the proposed project has profit before charging depreciation of ₹ 2,20,000. Company’s cost of capital is 10%. What is the IRR of this project?
(A) Between 10% to 15%
(B) Between 10% to 20%
(C) Between 18% to 19%
(D) Between 22% to 23%
Answer:
(D) Between 22% to 23%

Question 157.
Machine Z purchased at year zero for ₹ 5,00,000 which will be depreciated @25% for 5 years on written down value basis and then will be sold at ₹ 70,000. Capital gain tax rate is 35% while corporate income tax rate is 40%. What is the present value of cash flow of machine at 5th year if cost of capital is 12%?
(A) ₹ 68,326
(B) ₹ 39,690
(C) ₹ 49,345
(D) ₹ 87,028
Answer:
(C) ₹ 49,345

Question 158.
Machine P purchased at year zero at ₹ 10,00,000 which will be depreciated @ 25% for 5 years on written down value basis and then will be sold at ₹ 1,40,000. Tax rate is 35%. Profit before depreciation at 5th year is ₹ 84,000. What is the present value of CFAT at year five if cost of capital is 12%?
(A) ₹ 1,45,346
(B) ₹ 1,54,643
(C) ₹ 1,43,546
(D) ₹ 1,54,463
Answer:
(A) ₹ 1,45,346

Question 159.
Net present value of Machine X is ₹ 29.15 lakh. Cost of capital is 10%. Cash flow after tax for years 1 to 5 is ₹ 35 lakh, ₹ 80 lakh, ₹ 90 lakh, ₹ 75 & ₹ 20 lakh respectively. What is the purchase cost of Machine X?
(A) Not sufficient information is given.
(B) ₹ 150 lakh
(C) ₹ 100 lakh
(D) ₹ 200 lakh
Answer:
(D) ₹ 200 lakh

Question 160.
Following data is collected by the junior of finance department of Maya Ltd.

Both project requires same investment amounting to ₹ 400 lakh. Cost of capital of Maya Ltd. is 10%.
Managing Director (MD) thinks that project D should be selected whereas Company Secretary (CS) suggests to choose Project C. Who is Correct? Select correct answer from the options given below.
(A) MD as NPV @ 20% of Project D is more than Project C.
(B) CS as IRR of Project C is less than Project D.
(C) MD as IRR of Project D is more than Project C.
(D) CS as NPV 10% of Project C is more than Project D.
Answer:
(D) CS as NPV 10% of Project C is more than Project D.

Company’s cost of capital is 10% and NPV of Project C at that cost of capital is higher so it will get selected even though IRR of the Project D is higher because when NPV and IRR gives conflicting results; preference should be given to NPV Method.

Question 161.
A company is considering whether it should spend ₹ 10 lakhs on a project to manufacture and sell a new product. Unit variable cost of the product is ₹ 15. It is expected that the new product can be sold at ₹ 25 per unit. The annual fixed costs are ₹ 50,000. The project will have a life of 6 years with scrap value of ₹ 50,000. Cost of capital is 15%. The only uncertain factor is the volume of sales. Ignore taxation. Minimum volume of sales required to justify the project is -……….
(A) 30,852 units
(B) 33,487 units
(C) 28,453 units
(D) 34,741 units
Answer:
(A) 30,852 units

Question 162.
A project whose useful life is 4 years has IRR of 15% and will save cost of ₹ 1,60,000 annually. What is the project cost i.e. initial investment?
(A) ₹ 10,66,667
(B) ₹ 4,60,000
(C) ₹ 5,32,800
(D) ₹ 4,56,800
Answer:
(D) ₹ 4,56,800
Annual cost saving = Cash inflow = 1,60,000
Useful life = 4 years
IRR = 15%
At 15% IRR, total present value of cash inflow is equal to initial cash outlay.
Total present value of cash inflow @ 15% for 4 years is 2.855 = 1,60,000×2.855
= 4,56,800
Thus, Project cost = 4,56,800.
PV Table and annuity table will be provided in exam.

Question 163.
A professional kitchen is attempting to choose between gas and electricity for its main heat source. Once a choice is made, the kitchen intends to keep to that source indefinitely. Each gas oven has a net present value (NPV) of ₹ 50,000 over its useful life of 5 years. Each electric oven has an NPV of ₹ 68,000 over its useful life of 7 years. The cost of capital is 8%. Which should the kitchen choose and why?
(A) Gas because its average NPV per year is higher than electric
(B) Electric because its NPV is higher than gas
(C) Electric because its equivalent annual benefit is higher
(D) Electric because it lasts longer than gas
Answer:
(C) Electric because its equivalent annual benefit is higher
Equivalent NPV of gas oven = \(\frac{50,000}{3.9927}=12,523\)
Equivalent NPV of electric oven = \(\frac{68,000}{5.2064}=13,061\)

Question 164.
Universe Ltd. has an investment budget of ₹ 250 lakhs. The management wants to complete the financial appraisal before making the investment.

Company follows straight line method of will charging depreciation. Tax rate is 50%. Estimate life = 10 years (both projects).
You will advise to select – 2;
(A) Project B, as its payback period is less as compared to Project A
(B) Project B, as its payback period and ARR are higher than Project A.
(C) Project B, as its ARR is 10.35% where as ARR of Project A is 10.20%
(D) Project A, as its payback period is less and ARR is higher than Project B.
Answer:
(D) Project A, as its payback period is less and ARR is higher than Project B.

Question 165.
James Co. is considering a project with an initial cost of ₹ 6.2 Million. The project will produce cash inflows of ₹ 1.8 Million a year for 5 years. Firm uses the subjective approach to assign discount rates to projects. For this project, the subjective adjustment is +2%. Firm has a pre-tax cost of debt of 6.7% and a cost of equity of 9.4%. The debt-equity ratio is 0.6 and the tax rate is 35%. What is the NPV of the project?
(A) ₹ 8,11,000
(B) ₹ 7,90,900
(C) ₹ 7,42,060
(D) ₹ 7,10,200
Answer:
(D) ₹ 7,10,200

Subjective adjustment is +2%; thus rate will be 9.51% (7.51% + 2%).
18.00,000 × 3.839 = 69,10,200.
NPV = 69,10,200 – 62,00,000 = 7,10,200

Question 166.
Yogesh Ltd. has to make a choice between two identical machines, in terms of capacity, A and B. They have been designed differently, but do exactly the same job. Machine A costs ₹ 1,87,500 and will last for 3 years. It costs ₹ 50,000 p.a. to run. Machine B is an economy model costing only ₹ 1,25,000, but will last for only 2 years. It costs ₹ 75,000 p.a. to run. The cash flows of Machine A and B are real cash flows. The costs are forecasted in rupees of constant purchasing power. Ignore taxes. The opportunity cost of capital is 9%. Which machine the Yogesh Ltd. should buy?
(A) Machine B as its present value of cash outflow is less than Machine A.
(B) Machine A as its present value of cash outflow is less than Machine B.
(C) Machine B as it is cheaper than Machine A.
(D) Machine A as its equivalent present value of cash outflow is less than Machine B.
Answer:
(D) Machine A as its equivalent present value of cash outflow is less than Machine B.


Analysis: Company should buy Machine A since equivalent annual cash outflow is less than that of Machine B.

Question 167.
The net present value of a proposed project is ₹ 20,000 at a discount rate of 5% and (₹ 28,000) at 10%. What is the internal rate of return of the project, to the nearest one decimal place?
(A) 7.08%
(B) 7.05%
(C) 2.03%
(D) 8.06%
Answer:
(A) 7.08%

Question 168.
Monika Ltd. is considering investing in two competing projects: Delta & Gamma. Delta has NPV of ₹ 16,500 and IRR of 17%. Details of the estimated cash flows of Gamma are as follows:

The business has a cost of capital of 10%. Which of the following combinations is correct concerning the NPV and IRR of the two projects?

Answer:
(C)

Question 169.
ABC Ltd. wishes to undertake a project requiring an investment of ₹ 7,32,000 which will generate equal annual inflows of ₹ 1,46,400 in perpetuity. What is the IRR of the project?
(A) 20%
(B) 25%
(C) 400%
(D) 500%
Answer:
(A) 20%

Question 170.
A company purchases a non-current asset with a useful economic life of ten years for ₹ 12,50,000. It is expected to generate cash flows over the 10 year period of ₹ 2,50,000 p.a. before depreciation. The company charges depreciation over the life of the asset on SLM. At the end of the period it will be sold for ₹ 2,50,000. What is the ARR for the investment (based on average profits & average investment)? Ignore Taxation.
(A) 20%
(B) 15%
(C) 33%
(D) 25%
Answer:
(C) 33%

Question 171.
Tanishka is considering an investment in a new process. The new process will require an increase in stocks of ₹ 30,000 during the first year. There will also be an increase in debtors outstanding of ₹ 40,000 and an increase of creditors outstanding of ₹ 35,000 during the first year. The new process will use machinery that was purchased immediately before the first year of operations at a cost of ₹ 3,00,000. The machinery is depreciated using SLM and has an estimated life of 5 years and no residual value. During the first year, the net operating profit before depreciation from the new process is expected to be ₹ 1,80,000. The business uses the NPV method when evaluating investment proposals. When undertaking the NPV calculations, what would be the estimated net cash flow during the first year of the project? (Ignore taxation)
(A) ₹ 85,000
(B) ₹ 2,15,000
(C) ₹ 1,45,000
(D) ₹ 1,55,000
Answer:
(C) ₹ 1,45,000
Cash outflow = 30,000 + 40,000 – 35,000 = 35,000; Cash inflow = 1,80,000 – 35,000 = 1,45,000

Question 172.
LW Co. has a half empty factory on which it pays ₹ 5,000 p.a. If it takes on a new project, it will have to move to a new bigger factory costing ₹ 17,000 p.a. and it could rent the old factory out for ₹ 3,000 p.a. until the end of the current lease. What is the rental cost to be included in the project appraisal?
(A) ₹ 14,000
(B) ₹ 17,000
(C) ₹ 9,000
(D) ₹ 19,000
Answer:
(A) ₹ 14,000

Question 173.
The one year rate of inflation is expected to be 3%. The one year money discount rate is 6-3%. The one year real rate of discount is:
(A) 3-30%
(B) 3-20%
(C) 9-30%
(D) 9-49%
Answer:
(B) 3-20%
(1 + MDR) = (1 + RDR) × (1 + IR)
(1 + 0.063) = (1 + RDR) × (1 + 0.03)
1.063 = 1 + RDR × 1.03
1.032 = 1 + RDR
RDR = 0.032 i..e. 3.2%

Question 174.
The one year rate of inflation is expected to be 5%. The one year real discount rate is 10%. The one year money rate of discount is:
(A) 10%
(B) 13%
(C) 13.3%
(D) 15.5%
Answer:
(D) 15.5%
(1 + MDR) = (1 + RDR) × (1 + IR)
1 + MDR = (1 + 0.10) × (1 + 0.05)
1 + MDR = 1.1 × 1.05
1 + MDR = 1.155
MDR = 0.155 i..e. 15.5%

Question 175.
A company has 31 December as its accounting year end. On 1.1.2014 a new machine costing ₹ 2,00,000 is purchased. The company expects to sell the machine on 31.12.2015 for ₹ 3,50,000. The rate of corporation tax for the company is 30% and the same rate is applicable for capital profit/loss. Tax-allowable depreciation is obtained at 25% on the reducing balance basis. The company makes sufficient profits to obtain relief for capital allowances as soon as they arise. If the company’s cost of capital is 15%, what is the NPV?
(A) Positive ₹ 32,290
(B) Negative ₹ 32,290
(C) Positive ₹ 1,78,445
(D) Negative ₹ 1,78,445
Answer:
(A) Positive ₹ 32,290

Question 176.
A company has 31 December as its accounting year end. On 1.1.2014 a new machine costing ₹ 20,00,000 is purchased. The company expects to sell the machine on 31.12.2015 for ₹ 3,50,000. The rate of corporation tax for the company is 30% and the same rate is applicable for capital profit/loss. Tax-allowable depreciation is obtained at 25% on the reducing balance basis, and a balancing allowance is available on disposal of the asset. The company makes sufficient profits to obtain relief for capital allowances as soon as they arise. If the company’s cost of capital is 15%, what is the NPV?
(A) Negative ₹ 13,48,040
(B) Negative ₹ 13,44,080
(C) Positive ₹ 13,48,040
(D) Positive ₹ 13,44,080
Answer:
(B) Negative ₹ 13,44,080

Question 177.
A project has the following estimated cash inflows.
Year 1: — ₹ 1,00,000
Year 2: — ₹ 1,25,000
Year 3: — ₹ 1,05,000
Working capital is required to be in place at the start of each year equal to 1096 of the cash inflow for that year. The cost of capital is 1096. What is the present value of the working capital?
(A) Nil
(B) (30,036)
(C) (2,735)
(D) 33,000
Answer:
(B) (30,036)
Year 0 10,000 × 1.000 = 10,000
Year 1 = 12,500 × 0.909 = 11,363
Year 2 = 10,500 × 0.826 = 8,673
10,000 + 11,363 + 8,673 = 30,036

Question 178.
A company has to make a choice between two machines X and Y. The two machines are designed differently, but have identical capacity and do exactly the same job. Machine X cost ₹ 5,50,000 and will last for 3 years. It costs ₹ 1,25,000 per year to run. Machine Y is an economy model costing ₹ 4,00,000, but will last for 2 years and costs ₹ 1,50,000 per year to run. These are real cash flows. The costs are forecasted in rupees of constant purchasing power. Cost of capital is 12%. Ignore Taxes. Which machine company should buy?
(A) Machine X
(B) Machine Y
(C) Any Machine
(D) Any machine other than X and Y
Answer:
(A) Machine X

Question 179.
A Ltd. is considering the purchase of a machine which will perform some operations which are at present performed by workers. Machines X and Y are alternative models. The following details are available for year:

Depreciation will be charged on straight line basis. Tax rate is 30%. Cost of capital is 10%. A Ltd. will select –
(A) Machine X as it has higher NP V than Machine Y
(B) Machine Y as it has higher profitability index
(C) Machine X as it has higher profitability index
(D) Machine Y as it has higher ARR than Machine X
Answer:
(C) Machine X as it has higher profitability index

Question 180.
ANP Ltd. is providing the following information:
Annual cost of saving — ₹ 48,000
Useful life — 5 years
Salvage value Zero
Internal rate of return — 15%
Profitability index — 1.05
What is projects initial investment?
(A) ₹ 1,60,900
(B) ₹ 1,60,896
(C) ₹ 1,60,494
(D) ₹ 1,60,499
Answer:
(B) ₹ 1,60,896
Annual cost saving = Cash inflow = 48,000
Useful life = 5 years
IRR = 15%
At 15% IRR, total present value of cash inflow is equal to initial cash outlay.
Total present value of cash inflow @ 15% for 5 years is 3.353
= 48,000 × 3.352 = 1,60,896.
Thus, Project cost = 1,60,896.

Question 181.
Using the data of above question calculate payback period.
(A) 3.35 years
(B) 3.43 years
(C) 3.53 years
(D) 3.76 years
Answer:
(A) 3.35 years
1,60,896/48,000 = 3.35 year

Question 182.
GOL Ltd. is providing the following. What is cost of capital of GOL Ltd.?
(A) 12%
(B) 13%
(C) 14%
(D) 15%
Answer:
(B) 13%
Annual cost saving = Cash inflow = 96,000
Useful life = 5 years
IRR = 15%
At 15% IRR, total present value of cash inflow is equal to initial cash outlay.
Total present value of cash inflow @ 15% for 5 years is 3.353
= 96,000 × 3.353 = 3,21,888
Thus, Project cost = 3,21,888.
Calculation of cost of capital:

96,000x = 3,37,982
x = 3.521
Looking at present value table, discount factor for 5 years is 3.521
Hence, Cost of capital = 13%
Net present value = 3,37,982 – 3,21,888 = 16,094

Question 183.
Using the data of above question calculate NPV.
(A) ₹ 16,940
(B) ₹ 16,409
(C) ₹ 16,094
(D) ₹ 16,904
Answer:
(C) ₹ 16,094
Annual cost saving = Cash inflow = 96,000
Useful life = 5 years
IRR = 15%
At 15% IRR, total present value of cash inflow is equal to initial cash outlay.
Total present value of cash inflow .
15% for 5 years is 3.353 = 96,000 × 3.353 = 3,21,888
Thus, Project cost = 3,2 1,888.
calculation of cost of capitaL

96,000x = 3,37,982
x = 3.521
Looking at present value table, discount factor for 5 years is 3.521
Hence, Cost of capital 13%
Net present value = 3,37,982 – 3,2 1,888 = 16,094

Question 184.
In a capital rationing situation (investment limit ₹ 25 lakhs), suggest the most desirable feasible combination on the basis of the following data:

Suggest which combination of project should be selected.
(A) A & C
(B) B & D
(C) C & D
(D) A & B
Answer:
(D) A & B

From the above analysis it is observed that Project A & B combination gives highest NPV; hence projects A & B combination should be adopted as it will maximize wealth.

Question 185.
S Ltd. has ₹ 10,00,000 allocated for capital budgeting purposes. Following proposals and associated profitability indexes have been determined:

Which of the above investments should be undertaken? Assume that projects are indivisible and there is no alternative use of the money allocated for capital budgeting
(A) 1, 2 & 6
(B) 3, 4 & 5
(C) 2, 4 & 6
(D) 1, 3 & 5
Answer:
(B) 3, 4 & 5

Selection of Projects:
(1) Profitability Index Method: Assuming the projects are indivisible and there is no alternative use of unutilized amount, S Ltd. is advised to undertake investment in Projects 1, 3 & 5, which will give NPV of Rs. 1,76,000 and unutiized amount will be Rs. 1,50,000.
(2) Net Present Value Method: As per this method Projects 3,4 & 5 can be undertaken which will Rs. 1,91,000 and no money will remain unspent.
Suggestion: From the above analysis, we can observe that, selection of Projects under NP’ Method will maximize S Ltd. net cash inflow by Rs. 15,000 (1,91,000 – 1,76,000). Hence, it is suggested to undertake Projects 3, 4 & 5.

Question 186.
Calculate payback period for following two machines.

Answer:
(A)
Net cash inflow of Machine X and Y are 4,500 and 6,000 respectively.
Machine X = 4,000/4,500 = 0.88 year
Machine Y = 18,000/6,000 = 3 year

Question 187.
PT Ltd. is a manufacturer of plastic products. Company is considering computerizing the company’s ordering, inventory and billing procedures. The annual savings from computerization include a reduction of 4 clerical employees with annual salaries of ₹ 50,000 each. ₹ 30,000 from reduced production delays caused by raw materials inventory problems. ₹ 25,000 from lost sales due to inventory stock-outs and ₹ 18,000 associated with timely billing procedures. The purchase price of the system is ₹ 2,50,000 and installation costs are ₹ 50,000. These outlays will be capitalized (depreciated) on SLM basis to a zero salvage value, which is also its market value at the end of 5 years. New system requires two computer specialists with annual salaries of ₹ 80,000 per person. Also annual operating (cash) expenses of ₹ 22,000 are estimated to be required. Tax rate is 40% and cost of capital is 12%. Calculate cash flow after tax likely to be generated per year by this project.
(A) ₹ 76,800
(B) ₹ 78,600
(C) ₹ 75,700
(D) ₹ 77,500
Answer:
(B) ₹ 78,600

Question 188.
Take the data of above question and calculate Payback Period.
(A) 4.87 year
(B) 3.56 year
(C) 3.82 year
(D) 4.51 year
Answer:
(C) 3.82 year

Question 189.
Take the data of above question and calculate PI.
(A) 0.945
(B) 0.495
(C) 0.549
(D) 0.954
Answer:
(A) 0.945

Question 190.
Project X involves an initial outlay of Rs. 16.2 million. Its life span is expected to be 3 years. The cash streams generated by it are expected to be as follows:

IRR = ?
(A) 14.33%
(B) 15.79%
(C) 12.40%
(D) 15.30%
Answer:
(D) 15.30%

Question 191.
The initial outlay of the project is ₹ 1,00,000 and it generates cash inflow of ₹ 50,000, ₹ 40,000, ₹ 30,000 & ₹ 20,000 in the 4 years of its life span. Cost of capital is 10%. You are required to calculate Cost Benefit Ratio.
(A) 1.147
(B) 1.474
(C) 1.389
(D) 1.578
Answer:
(A) 1.147

Question 192.
Software Enterprise is considering the purchase of computer system for its research and development division. The operating cost excluding depreciation are expected to be ₹ 7,00,000 p.a. It is estimated that the useful life of the system would be 6 years, at the end of which the disposal value is expected to be ₹ 1,00,000. Tangible benefit expected from the system in the form of reduction in design and draftsmanship costs would be ₹ 12,00,000 p.a. Gain arising from disposal of used assets may be considered tax-free. Corporate tax rate is 35%. CFAT = ?
(A) ₹ 5,66,667
(B) ₹ 6,17,444
(C) ₹ 5,23,333
(D) ₹ 7,34,222
Answer:
(C) ₹ 5,23,333

Question 193.
Nishce Ltd. is an all equity financed company. The current market price of the share is ₹ 180. It had just paid a dividend of ₹ 15 per share and expected future growth in dividends is 12%. Currently, it is the evaluating a proposal requiring funds of ₹ 20,00,000 with annual inflow of ₹ 10,00,000 for 3 years. Find out the NPV of the proposal if it is financed from retained earnings.
(A) ₹ 64,300
(B) ₹ 63,400
(C) ₹ 66,400
(D) ₹ 63,600
Answer:
(B) ₹ 63,400

Question 194.
Narayan Ltd. is an all equity financed company. The current market price of the share is ₹ 180. It had just paid a dividend of ₹ 15 per share and expected future growth in dividends is 12%. Currently, it is the evaluating a proposal requiring funds of ₹ 20,00,000 with annual inflow of ₹ 10,00,000 for 3 years. Find out the NPV of the proposal if it is financed by issuing fresh equity (floatation costs 5%).
(A) ₹ 47,400
(B) ₹ 47,900
(C) ₹ 46,488
(D) ₹ 42,445
Answer:
(B) ₹ 47,900

Question 195.
Xpert Engineering Ltd. is considering buying one of the following two mutually exclusive investment projects:
Project A: Buy a machine that requires an initial investment outlay of ₹ 1,00,000 and will generate CFAT of ₹ 30,000 per year for 5 years.
Project B: Buy a machine that requires an initial investment outlay of ₹ 1,25,000 and will generate CFAT of ₹ 27,000 per year for 8 years.
The company uses 10% cost of capital to evaluate the projects.
The company will select –
(A) Project B as its NPV is high than Project A.
(B) Project B as its equivalent NPV is high than Project A.
(C) Project A as its equivalent NPV is high than Project B.
(D) Project A as its NPV is high than Project B.
Answer:
(C) Project A as its equivalent NPV is high than Project B.

Question 196.
Electrofast Ltd. is manufacturing electronic equipments in which Component-X is used, which is purchased from a local supplier at a cost of ₹ 40 each. In order to bring down cost and improve its competitiveness, the company has a proposal to install a machine for the manufacture of Component-X. It has the following two options:
Installation of semi-automatic machine involving annual fixed expenses of ₹ 22 lakh and a variable cost of ₹ 18 per component manufactured.
Installation of automatic machine involving an annual fixed cost of ₹ 40 lakh and a variable cost of ₹ 15 per component manufactured. Calculate components required to be produced to justify the installation of the machine
(A) 1,00,000 units & 1,60,000 units
(B) 50,000 units & 80,000 units
(C) 1,50,000 units & 1,00,000 units
(D) 1,40,000 units & 1,80,000 units
Answer:
(A) 1,00,000 units & 1,60,000 units

Question 197.
The management of Techno Craft Ltd. is evaluating the following data of a capital project:
Annual cost saving (₹) — 80,000
Useful life (Years) — 5
Internal rate of return (%) — 12
Profitability index (PI) — 1.2705
Project Cost = ?
(A) ₹ 2,44,800
(B) ₹ 2,84,800
(C) ₹ 2,88,400
(D) ₹ 2,48,400
Answer:
(C) ₹ 2,88,400

Question 198.
Take the data from above question and calculate payback period.
(A) 3.605 years
(B) 3.642 years
(C) 4.605 years
(D) 4.208 years
Answer:
(A) 3.605 years

Question 199.
Take the data from above question and calculate cost of capital.
(A) 8%
(B) 6%
(C) 5%
(D) 3%
Answer:
(D) 3%

Question 200.
A company is considering three methods of attracting customers to expand its business by undertaking – (A) advertising campaign; (B) display of neon signs; and (C) direct delivery service. The initial outlay for each alternative is as under:
A ₹ 1,00,000
B ₹ 1,50,000
C ₹ 1,50,000
If A is carried out, but not B, it has an NPV of ₹ 1,25,000. If B is done, but not A, B has an NPV of ₹ 45,000. However, if both are done, then NPV is ₹ 2,00,000. The NPV of the delivery system C is ₹ 90,000. Its NPV is not dependent on whether A or B is adopted and the NPV of A or B does not depend on whether C is adopted. Which of the investments should be made by the company if Firm has no budget constraint?
(A) The firm should adopt mode A + C only. The outlay would be ₹ 2,50,000 & total NPV would be ₹ 2,15,000.
(B) The firm should adopt mode B + C only. The outlay would be ₹ 3,00,000 & total NPV would be ₹ 1,35,000
(C) The firm should adopt mode A only. The outlay would be ₹ 1,00,000 & total NPV would be ₹ 1,25,000
(D) The firm should adopt all the three modes of attracting customers. Its outlay would be ₹ 4,00,000 and the expected NPV would be ₹ 2,90,000.
Answer:
(D) The firm should adopt all the three modes of attracting customers. Its outlay would be ₹ 4,00,000 and the expected NPV would be ₹ 2,90,000.

No Budget Constraint: The firm should adopt all the three modes of attracting customers. Its outlay in this case would be ₹ 4,00,000 and the expected NPV would be ₹ 2,90,000.
Budget Constraint: If the budget constraints are limited to ₹ 2,50,000 then the firm should adopt mode A + C only. In this case, the outlay would be ₹ 2,50,000 and the total NPV would be ₹ 2,15,000

Question 201.
A company is considering three methods of attracting customers to expand its business by undertaking – (A) advertising campaign; (B) display of neon signs; and (C) direct delivery service. The initial outlay for each alternative is as under:
A ₹ 1,00,000
B ₹ 1,50,000
C ₹ 1,50,000
If A is carried out, but not B, it has an NPV of ₹ 1,25,000. If B is done, but not A, B has an NPV of ₹ 45,000. However, if both are done, then NPV is ₹ 2,00,000. The NPV of the delivery system C is ₹ 90,000. Its NPV is not dependent on whether A or B is adopted and the NPV of A or B does not depend on whether C is adopted. Which of the investments should be made by the company if the budgeted amount is only ₹ 2,50,000?
(A) The firm should adopt mode. A + B only. The outlay would be ₹ 2,50,000 & total NPV would be ₹ 2,00,000
(B) The firm should adopt mode B + C only. The outlay would be ₹ 3,00,000 & total NPV would be ₹ 1,35,000
(C) The firm should adopt mode A + C only. The outlay would be ₹ 2,50,000 & total NPV would be ₹ 2,15,000.
(D) None of the above
Answer:
(C) The firm should adopt mode A + C only. The outlay would be ₹ 2,50,000 & total NPV would be ₹ 2,15,000.

No Budget Constraint: The firm should adopt all the three modes of attracting customers. Its outlay in this case would be ₹ 4,00,000 and the expected NPV would be ₹ 2,90,000.
Budget Constraint: If the budget constraints are limited to ₹ 2,50,000 then the firm should adopt mode A + C only. In this case, the outlay would be ₹ 2,50,000 and the total NPV would be ₹ 2,15,000

Question 202.
A company is faced with decision to purchase or acquire on lease a machine. Cost of the machine is ₹ 2,53,930. The asset can be financed by taking loan on which interest is payable @15% and loan will be paid in 5 equal installments inclusive of interest. Tax rate is 40%. Assume loan instalment is payableat the end of each year. What will be the loan instalment amount for each year?
(A) ₹ 75,800
(B) ₹ 65,278
(C) ₹ 67,800
(D) ₹ 66,824
Answer:
(A) ₹ 75,800

Question 203.
X Ltd. faced with decision to purchase or acquire on lease a machine. Cost of the machine is ₹ 5,07,860. The asset can be financed by taking loan on which interest is payable @15% and loan will be paid in 5 equal instalments inclusive of interest. Tax rate is 40%. Assume loan instalment is payable at the beginning of the year. What will be the loan instalment amount for each year?
(A) ₹ 1,19,778
(B) ₹ 1,29,580
(C) ₹ 1,31,570
(D) ₹ 1,45,452
Answer:
(C) ₹ 1,31,570

Question 204.
A company can obtain an asset on lease by paying 5 equal lease rentals annually. Such lease rentals are payable at the end of the year. The leasing company desires a return of 10% on the gross value of the asset. Tax rate is 40%. Cost of capital is 9%. The cost of the asset is ₹ 7,61,790. Calculate the lease rental payable by the company each year.
(A) ₹ 2,01,000
(B) ₹ 1,95,833
(C) ₹ 1,98,563
(D) ₹ 2,10,000
Answer:
(A) ₹ 2,01,000

Question 205.
A company can obtain an asset on lease by paying 5 equal lease rentals annually. Such lease rentals are payable at the beginning of the year. The leasing company desires a return of 10% on the gross value of the asset. Tax rate is 40%. Cost of capital is 9%. The cost of the asset is ₹ 7,61,790. Calculate the lease rental payable by the company each year.
(A) ₹ 1,79,667
(B) ₹ 1,80,600
(C) ₹ 1,87,504
(D) ₹ 1,82,683
Answer:
(D) ₹ 1,82,683

Question 206.
Z Ltd. can acquire a machine by taking 15% loan or on lease basis from leasing company. Cost of machine is ₹ 1,26,965. Tax rate is 40%. The leasing company desires a return of 10% on the gross value of the asset. The present value of cash flow under buying option is ₹ 87,528. What should be the annual lease rental to be charged by the leasing company to match the loan option?
(A) ₹ 37,900
(B) ₹ 37,805
(C) ₹ 37,424
(D) ₹ 37,501
Answer:
(D) ₹ 37,501
PV Factor = 15 (1 – 0.4) = 9%
Let the lease rental be ‘*’

O.6x × 3.89 = 87,528
2.334x = 87,528
x = 37501

Question 207.
Agrani Ltd. is in the business of manufacturing bearings. Some more product lines are being planned to be added to the existing system. The cost of machine is ₹ 40,00,000 having a useful life of 5 years with the salvage value of ₹ 8,00,000. The full purchase value of machine can be financed by 20% loan repayable in 5 equal instalments falling due at the end of each year. Calculate the figure of interest payable at the end of 5th year.
(A) ₹ 4,08,831
(B) ₹ 2,08,138
(C) ₹ 2,21,813
(D) ₹ 3,12,318
Answer:
(C) ₹ 2,21,813

Question 208.
Following data are furnished by Lalita Leasing Ltd.:
Investment cost — ₹ 1,250 lakhs
Primary lease term — 5 years
Residual value — Nil
Pre-tax required rate return — 24%
Company wants to charge equated lease rentals Le. equal amount of lease rental per year. Lease rental payable at the end of each year = ?
(A) ₹ 437.35 lakh
(B) ₹ 457.53 lakh
(C) ₹ 453.73 lakh
(D) ₹ 455.37 lakh
Answer:
(D) ₹ 455.37 lakh

Question 209.
Following data are furnished by XY Leasing Ltd.:
Investment cost — ₹ 1,250 lakhs
Primary lease term — 5 years
Residual value — Nil
Pre-tax required rate of return — 25%
Company wants to charge stepped lease rentals (annual increase of 15%).
Lease rental for the 3rd year = ?
(A) ₹ 436.26 lakh
(B) ₹ 501.68 lakh
(C) ₹ 379.36 lakh
(D) ₹ 225.25 lakh
Answer:
(A) ₹ 436.26 lakh

Question 210.
Apple Ltd. has decided to invest in earth-moving equipment which costs ₹ 5,50,000. The company can take it on lease for 7 years at ₹ 90,000 p.a. payable in advance. Alternatively, it can borrow at 20%. Asset can be written-off over 6 years under straight line method of depreciation. Asset’s useful life is ₹ years. In the terminal year the asset will be sold for ₹ 40,000. Tax rate is 30%. At 6th year principle amount contained in loan installment amount will be –
(A) ₹ 88,265
(B) ₹ 1,05,918
(C) ₹ 1,27,323
(D) ₹ 1,08,426
Answer:
(B) ₹ 1,05,918

Question 211.
A company buys a machine for ₹ 10,000 and sells it for ₹ 2,000 at the end of year 3. Running costs of the machine are:
Year 1 = ₹ 3,000
Year 2 = ₹ 5,000
Year 3 = ₹ 7,000
If a series of machines are brought, run and sold on an infinite cycle of replacements, what is the equivalent annual cost of the machine if the discount rate is 10%?
(A) ₹ 22,114
(B) ₹ 8,288
(C) ₹ 246
(D) ₹ 7,371
Answer:
(B) ₹ 8,288

Question 212.
T Ltd. is considering an investment in one of two mutually exclusive projects. Company is committed to maximizing the wealth of its shareholders. Details of each project, which have the same level of risk, are as follows:

Which project should be selected and for what reason?
(A) Project Alpha because it has the shorter discounted payback period
(B) Project Alpha because it has the higher net present value
(C) Project Beta because it has the higher profitability index
(D) Project Beta because it has the higher internal rate of return
Answer:
(B) Project Alpha because it has the higher net present value

Question 213.
Taxmann is considering to take a new project. Management use Certainty Equivalent (CE) approach to evaluate the projects. The project is expected to generate cash flow of ₹ 57,500 for next 5 years. CE Factors are 0.90, 0.85, 0.75, 0.70 & 0.65. Projects requires initial investment of ₹ 1,50,000. Company’s cost of capital is 12% and risk free borrowing rate is 7%. What is the NPV of this project?
(A) ₹ 24,486
(B) ₹ 38,103
(C) ₹ 33,603
(D) ₹ 27,542
Answer:
(C) ₹ 33,603

Question 214.
Present value at year 3 is ₹ 35,190 by using CE Approach. CE Factor is 0.75. Risk free rate is 7%. Cost of capital is 11%. What is the cash flow of year 3?
(A) ₹ 57,500
(B) ₹ 55,500
(C) ₹ 52,500
(D) ₹ 56,500
Answer:
(A) ₹ 57,500
PV factor at 7% for year 3 is 0.816.
Cash flow 35,190 ± 0.8 16 ÷ 0.75 = 57,500

Question 215.
A company has ₹ 5,00,000 available for investment and is considering the following four divisible, but not repeatable, projects to invest in:

What is the maximum net present value the company can generate from its investment?
(A) ₹ 1,95,000
(B) ₹ 1,45,000
(C) ₹ 1,35,000
(D) ₹ 1,10,000
Answer:
(C) ₹ 1,35,000

Question 216.
X Ltd. is considering to start a new project for which it has gathered following data:
Cash Flow — Probability
1,08,000 — 0.1
2,16,000 — 0.4
4,32,000 — 0.4
5,40,000 — 0.1
Calculate the expected cash flow.
(A) ₹ 3,42,000
(B) ₹ 3,18,000
(C) ₹ 3,24,000
(D) ₹ 3,32,000
Answer:
(C) ₹ 3,24,000

Question 217.
X Ltd. is considering to start a new project for which it has gathered following data:

Compute the risk associated with the project.
(A) 89.88
(B) 9.30
(C) 11.62
(D) 8.97
Answer:
(B) 9.30

Question 218.
A company is considering Projects X and Y with following information:

Which project will you recommend and why?
(A) Project Y as its higher expected NPV.
(B) Project X as its coefficient of variation is high.
(C) Project Y as its coefficient of variation is less.
(D) Project X as its risk ie. standard deviation is less.
Answer:
(C) Project Y as its coefficient of variation is less.
On the basis of information about standard deviation of Project X & Y, the Project X is better as it has lower standard deviation (i.e. risk). However, the coefficient of variation for these projects may be found as follows:

Project Y = \(\mathrm{Y}=\frac{3,600}{11,000}=0.327\)
Project Y is better as its CV is lesser than Project X.

Question 219.
Laxmi Ltd. is considering a proposal to buy one of the two machines. Each machine requires investment of ₹ 34,375 and has useful life of 12 years. Estimates associated with these two machines are as follows:

(A) The company will select Machine X as its NP V is high in optimistic scenario
(B) The company will select Machine Y as its NPV is high in optimistic scenario
(C) Purchasing Machine Y will be more risky as NPV is negative as high as ₹ 7,523 while if Machine X is purchased, the NPV can be negative only ₹ 2,980.
(D) Purchasing Machine Y will be more risky as NPV is negative as high as ₹ 28,954 while if Machine X is purchased, the NPV can be negative only ₹ 4,560.
Answer:
(D) Purchasing Machine Y will be more risky as NPV is negative as high as ₹ 28,954 while if Machine X is purchased, the NPV can be negative only ₹ 4,560.

Analysis: Purchasing Machine Y will be more risky as XPV is negative as high as 28,954 while if Machine X is purchased, the NPV can be negative only 4,560. Hence, it advised to purchase Machine X.

Question 220.
Following data is available for Project Q:

Project requires initial investment of ₹ 180 Crore. Calculate the profitability index of the Project P.
(A) 0.25
(B) 1.25
(C) 1.35
(D) 1.45
Answer:
(B) 1.25
Expected NPV (15 × 0.2) + (30 × 0.3) + (60 × 0.3) + (75 × 0.2) = 45
Total present value 45 Crore + 180 Crore = 225 Crore
Profitability Index 225/180 = 1.25

Question 221.
Following data is available for Project P:
NPV ( in Crore) — Probability
15 — 0.1
30 — 0.4
60 — 0.4
75 — 0.1
Calculate co-efficient of variation for the Project P.
(A) 0.42
(B) 0.43
(C) 0.44
(D) 0.45
Answer:
(A) 0.42

Question 222.
B Ltd. is considering the renovation of its one of department. The renovation will cost 10 lakh. Its CFAT sensitive to various events as show below:

Company estimates that the probability distribution of incremental CFAT will exists for 4 years. The company’s cost of capital is 10%. What is the project expected NPV?
(A) ₹ 3,41,300
(B) ₹ 3,13,400
(C) ₹ 3,31,400
(D) ₹ 3,00,340
Answer:
(C) ₹ 3,31,400

Question 223.
A project is expected to generate CFAT of ₹ 3,56,000. Other data relating to project are as follows:
Useful life = 6 years.
Risk free rate = 8%
Certainty factor = 0.9
Tax rate = 35%
Initial investment = ₹ 12,00,000.
Depreciation Method = SLM.
Calculate risk adjusted IRR of the project using rates of 8% & 16%.
(A) 14.62%
(B) 18.51%
(C) 16.47%
(D) 15.49%
Answer:
(D) 15.49%

Question 224.
Raja & Co. desires to take a project whose cost is ₹ 12,000 and useful life is 4 years. Expected annual cash flows are ₹ 4,500 p.a. Cost of capital is 14%. Calculate the sensitivity of the project cost in percentage given that:
PVAF_(14%,4): 2.9137
(A) 10%
(B) 8.72%
(C) 12.56%
(D) 9.27%
Answer:
(D) 9.27%

Question 225.
Following forecasts are made about a proposal which is being evaluated by a firm:
Initial outlay : ₹ 1,50,000
Life: 4 years
CFAT: ₹ 56,250
PVAF_(14%,3): 2.3216
PVAF_(14%,4): 2.9137
Calculate the sensitivity of the annual cash flows.
(A) 8.48%
(B) 9.32%
(C) 7.77%
(D) 8.84%
Answer:
(A) 8.48%

2.9137x – 1,50,000 = 0
2.9137x = 1,50,000
= 51,481
The CFAT can decrease from the present level of ₹ 56,250 to ₹ 51,481 before NPV becomes zero. So, the CFAT have a margin of ₹ 4,769.
Margin for CFAT = \(\frac{4,769}{56,250} \quad \times 100=8.48 \%\)

Question 226.
Rani & Co. desires to take a project whose cost is ₹ 12,000 and useful life is 4 years. Expected annual cash flows are ₹ 4,500 p.a. Cost of capital is 14%. Calculate the sensitivity of the ‘cost of capital’ in percentage given that:
PVAF_(14%,4) : 2.9137
PVAF _(18%,4): 2.6667
(A) 29%
(B) 22%
(C) 22%
(D) 64%
Answer:
(A) 29%

4,500x- 12000=0
4,500x= 12,000
x = 2.6667
The PVAF 26667 is found for 4 years in 18% column in the PVAF table. Thus, the discount rate can increase from the present level of 14% to 18% before the NPV becomes zero. Therefore, there is margin of 4% (18% – 14%) or 2996 (Le. 4/14 ×100).

Question 227.
X Ltd. is considering a project with following cash flow:
Cost of the plant: 70,000

The cost of capital is 8%. Measure the sensitivity of the project to the change in level of plant cost.
PVAF_(8%1): 0.926
PVAF_(8%2): 0.857
(A) 8. 92%
(B) 7. 50%
(C) 9. 16%
(D) 8. 00%
Answer:
(D) 8. 00%

If the present value of running cost increases by 5,605 the NPV will become zero. Therefore sensitivity for running cost is.
\(\frac{5,605}{39,945} \times 100=14.03 \%\)
If the present value of savings decreases by 5,605 the NPV will become zero. Therefore sensitivity for savings is –
\(\frac{5,605}{1,15,550} \times 100=4.85 \%\)

Question 228.
Y Ltd. is considering a project with following cash flow:
Cost of the plant: 70,000

The cost of capital is 8%. Measure the sensitivity of the project to the change in level of running cost.
PVAF_(8%1): 0.926
PVAF_(8%2): 0.857
(A) 15.06%
(B) 13.07%
(C) 14.03%
(D) 12.08%
Answer:
(C) 14.03%

If the present value of running cost increases by 5,605 the NPV will become zero. Therefore sensitivity for running cost is.
\(\frac{5,605}{39,945} \times 100=14.03 \%\)
If the present value of savings decreases by 5,605 the NPV will become zero. Therefore sensitivity for savings is –
\(\frac{5,605}{1,15,550} \times 100=4.85 \%\)

Question 229.
Z Ltd. is considering a project with following cash flow:
Cost of the plant: 70,000

The cost of capital is 8%. Measure the sensitivity of the project to the change in level of savings.
PVAF_(8%1): 0.926
PVAF_(8%2): 0.857
(A) 3.58%
(B) 4.85%
(C) 8.54%
(D) 6.78%
Answer:
(B) 4.85%

If the present value of running cost increases by 5,605 the NPV will become zero. Therefore sensitivity for running cost is.
\(\frac{5,605}{39,945} \times 100=14.03 \%\)
If the present value of savings decreases by 5,605 the NPV will become zero. Therefore sensitivity for savings is –
\(\frac{5,605}{1,15,550} \times 100=4.85 \%\)

Question 230.
A project has expected NPV of 1,22,000. Its coefficient of variation is 0.7377. Risk free rate is 8% and cost of capital is 10%. What is the standard deviation of project?
(A) 1,00,000
(B) 80,000
(C) 90,000
(D) 88,889
Answer:
(C) 90,000
1,22,000 × 0.7377 = 89,999
i.e 90,000

Question 231.
Following data is available for Project A:
Net cash outlay — 11,00,000
Project life 5 Years
Annual cash inflow — ₹ 30,000
Coefficient of variation — 0.4
Company selects the risk adjusted rate of discount on the basis of coefficient of variation.

Determine the risk adjusted net present value of the Project A.
(A) 6,550
(B) 7,940
(C) 8,150
(D) 9,340
Answer:
(C) 8,150

Question 232.
Following financial information relates to an investment project:


What is the sensitivity of the net present value of the investment project to a change in sales volume?
(A) 7.1%
(B) 2.6%
(C) 5.1%
(D) 5.3%
Answer:
(B) 2.6%
If the present value of sales decreases by 1,300 the NPV will become zero. Therefore sensitivity for sales is-
\(\frac{1,300}{50,025} \times 100=2.6 \%\)