1. The probability-tree analysis is best used when cash flows are expected to be:

2. A firm that ignores risk differences (does not adjust for risk) when choosing new investment projects will generally –

3. A ____approach to examine 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.

4. The decision-tree approach is used in:

5. 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. The tax rate is 40%. The cost of capital is 9%. The cost of the asset is ₹ 7,61,790. Calculate the lease rental payable by the company each year.

6. Where capital availability is unlimited and the projects are riot mutually exclusive, for the same cost of capital, following criterion is used?

7. 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

8. ___ is the discount rate that should be used in capital budgeting.

9. You are considering two projects namely Project X and Project Y.
Project X has a low standard deviation but a high coefficient of variation as compared to Project Y.
Project Y has a high standard deviation but a low coefficient of variation as compared to Project X.
Which project will you select?

10. What is the idea behind project-specific required rates of return for a firm or division?

11. When choosing among mutually exclusive projects, the project with –

12. What is the difference between economic profit and accounting profit?

13. A project whose acceptance does not prevent or require the acceptance of one or more alternative projects is referred to as

14. Rakesh Ltd. is considering investing 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?

15. Which of the following statements is correct regarding the risk-adjusted discount rate (RADR) approach?

16. 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 1696 & 1296, respectively. RADR appropriate to Project X is 1896, while Project Y’s RADR is only 1096. The company’s overall, weighted-average cost of capital is 1496. Damodhar should –

17. A project is accepted when:

18. The decision to accept or reject a capital budgeting project depends on –

19. Ranking projects according to their ability to repay quickly may be useful to firms:

20. X Ltd. faced with the decision to purchase or acquire on lease a machine. The cost of the machine is ₹ 5,07,860. The asset can be financed by taking a loan on which interest is payable @15% and the loan will be paid in 5 equal installments inclusive of interest. The tax rate is 40%. Assume loan installment is payable at the beginning of the year. What will be the loan installment amount for each year?

21. If two projects are completely independent (or unrelated), the measure of the correlation between them is:

22. A company is faced with the decision to purchase or acquire on lease a machine. The cost of the machine is ₹ 2,53,930. The asset can be financed by taking a loan on which interest is payable @15% and the loan will be paid in 5 equal installments inclusive of interest. The tax rate is 40%. Assume loan installment is payable at the end of each year. What will be the loan installment amount for each year?

23. The profitability index of Project X is 1.20167 when its cash flow is discounted at 12%. The initial investment in the project was ₹ 1,50,000. This project generates equal cash flow over five years time. How much cash flow will be generated by the project each year?

24. Consider the 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 investment or reject it.
2. In relation to capital budgeting, sensitivity analysis deals with the consideration of the sensitivity of the NPV to different variables contributing to the NPV.
Select the correct answer from the options given below:

25. 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. The tax rate is 40%. The cost of capital is 9%. The cost of the asset is ₹ 7,61,790. Calculate the lease rental payable by the company each year.