CAIIB · ABFM

CAPITAL INVESTMENT DECISION

Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Advanced Business and Financial Management — CAIIB.

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What is a capital investment decision?

A capital investment decision involves committing funds to long-term assets that are expected to generate returns over several years, fundamentally shaping the firm's productive capacity and future profitability.

What is the difference between independent and mutually exclusive projects?

Independent projects can be accepted together; mutually exclusive cannot.

What is the Net Present Value (NPV) method in capital budgeting?

NPV is the difference between the present value of future cash inflows and the initial investment outlay, discounted at the cost of capital; a positive NPV indicates value creation for shareholders.

What is a contingent project in capital budgeting?

A project whose acceptance depends on accepting another project.

What does the Internal Rate of Return (IRR) represent?

IRR is the discount rate at which the NPV of a project equals zero; a project is accepted if its IRR exceeds the firm's required rate of return or hurdle rate.

What does the term 'capital budgeting' specifically refer to?

Process of planning and evaluating long-term investment proposals.

How does the Payback Period method evaluate a capital project?

The payback period measures the number of years required to recover the initial investment from net cash inflows; it is simple but ignores time value of money and cash flows beyond the payback period.

What is the decision rule for accepting a project using the NPV method?

Accept if NPV is positive; reject if NPV is negative.

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