DECISION MAKING Numerical
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Advanced Business and Financial Management — CAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
What is the Net Present Value (NPV) decision rule for accepting a project?
Accept the project if NPV is positive (NPV > 0), as it indicates the project adds value to the firm by generating returns above the required rate of return.
What is the NPV of a project if initial investment is ₹1,00,000 and PV of inflows is ₹1,20,000?
NPV is ₹20,000 (positive, accept the project).
How is the Internal Rate of Return (IRR) defined in capital budgeting decisions?
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 cost of capital or hurdle rate.
If annual cash inflow is ₹25,000 and initial outlay is ₹1,00,000, what is the payback period?
Payback period is 4 years (1,00,000 ÷ 25,000).
What is the Profitability Index (PI) and its acceptance criterion?
PI is the ratio of the present value of future cash inflows to the initial investment; a project is accepted if PI is greater than 1.
How is the Profitability Index calculated when NPV is ₹20,000 and investment is ₹1,00,000?
PI = 1.20 (1 + 20,000/1,00,000).
How is the Payback Period calculated for a project with equal annual cash flows?
Payback Period = Initial Investment / Annual Cash Inflow; it measures the time required to recover the initial investment from the project's cash flows.
What is the present value of ₹10,000 received after 3 years at 10% discount rate?
PV = ₹7,513 (10,000 ÷ 1.10³).
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