Capital investment decisions & Term loans
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Accounting and Financial Management for Bankers — JAIIB.
One-liners from this chapter
Free sample — 8 of 65 rapid-fire Q&A cards.
What is a capital investment decision?
A capital investment decision involves committing long-term funds to projects or assets expected to generate returns over several years, such as purchasing machinery or setting up a new branch.
What is the Accounting Rate of Return (ARR) method in capital budgeting?
ARR measures average annual profit as a percentage of investment.
What is the payback period method?
The payback period is the time required to recover the initial investment from the project's cash inflows; it is simple to calculate but ignores the time value of money and cash flows beyond the payback period.
What is the Net Present Value (NPV) decision rule for project acceptance?
Accept project if NPV is positive; reject if negative.
What does NPV stand for and how is it used?
NPV stands for Net Present Value; it is the difference between the present value of future cash inflows and the initial investment, and a project is accepted if NPV is positive.
What is the formula for calculating the Profitability Index (PI)?
PI equals present value of cash inflows divided by initial investment.
What is the Internal Rate of Return (IRR)?
IRR is the discount rate at which the NPV of a project becomes zero; a project is accepted if its IRR exceeds the firm's required rate of return or cost of capital.
What is a balloon payment in the context of term loans?
A large lump-sum payment due at the end of loan tenure.
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