1. What is capital budgeting? Explain its needs and importance.
2. What are the stages of capital budgeting process?
3. Explain the various methods of capital budgeting techniques.
4. What is risk and uncertainty?
5. Calculate the payback period from the following information:
Cash outlay Rs. 50,000 and cash inflow Rs. 12,500. (Ans. 4 years)
6. From the following information, calculate the pay-back periods for the 3 projects.
Which liquors Rs. 2,00,000 each? Suggest most profitable project.
Year Project I Project II Project III
1 50,000 60,000 35,000
2 50,000 70,000 45,000
3 50,000 75,000 85,000
4 50,000 45,000 50,000
5 50,000 – 35,000
7. The machine cost Rs. 1,00,000 and has scrap value of Rs. 10,000 after 5 years. The
net profits before depreciation and taxes for the five years period are to be projected
that Rs. 20,000, Rs. 24,000, Rs. 30,000, Rs. 26,000 and Rs. 22,000. Taxes are
50%. Calculate pay-back period and accounting rate of return.
(Ans. 4 years 3 months and 11.2%)
8. A company has to choose one of the following two actually exclusive machine.
Both the machines have to be depreciated. Calculate NPV.
Cash inflows
Year Machine X Machine Y
0 –20,000 –20,000
1 5,500 6,200
2 6,200 8,800
3 7,800 4,300
4 4,500 3,700
5 3,000 2,000
Capital Budgeting 145
9. A machine cost Rs. 1,25,000. The cost of capital is 15%. The net cash inflows
are as under:
Year Rs.
1 25,000
2 35,000
3 50,000
4 40,000
5 25,000
Calculate internal rate of return and suggest whether the project should be
accepted of cost.
10. Which project will be selected under NPU and IRR?
A B
Cash outflow 2,00,000 3,00,000
Cash inflows at the end of
1 Year 60,000 40,000
2 Year 50,000 50,000
3 Year 50,000 60,000
4 Year 40,000 90,000
5 Year 30,000 1,00,000
Cost of capital is 10%.
11. SP Limited company is having two projects, requiring a capital outflow of
Rs. 3,00,000. The expected annual income after depreciation but before tax is
as follows:
Year Rs.
1 9,000
2 80,000
3 70,000
4 60,000
5 50,000
Depreciation may be taken as 20% of original cost and taxation at 50% of net
income:
You are required 10 calculated
(a) Pay-back period (b) Net present value
(c) According rate of return (d) Net present value index.
(e) Internal rate of return.
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Financial Management
12. From the following information, select which project is better.
Cash Inflows (Year) I II
0 –20,000 –20,000
1 7,000 8,000
2 7,000 9,000
3 6,000 5,000
Risk less discount rate is 5%. Project I is less risks as compared to project II.
The management consider risk premium rates at 5% and 10% respectively
appropriate for discounting the cash inflows.
13. There are two mutually exclusive projects I and II. Each projects requires an
investment of Rs. 60,000. The following are the cash inflows and certainly
co-efficient are as follows.
Project I Project II
Year Cash inflow Certainty Cash Inflow Certainty
Co-efficient Co-efficient
1 30,000 .7 25,000 .9
2 25,000 .8 25,000 .8
3 25,000 .9 30,000 .7
Risk-free cutoff rate is 10%. Evaluate which project will be considered.
14. Mr. X is considering two mutually exclusive investment I and II. From the
following details advice Mr. X.
Project I Project II
Cost of investment 75,000 75,000
Annual income for 5 years Optimistic 37,500 41,250
Most likely 26,250 22,500
Pesionistic 15,000 15,000
The cutoff rate is 12%.
Capital Budgeting 147
15. Two mutually exclusive projects are being considered. The following detail is
available.
Year Project A Project B
Rs. Profitability Rs. Profitability
1 12,000 – 12,000 –
2 10,000 .2 10,000 .2
3 15,000 .6 20,000 .6
4 25,000 .2 20,000 .2
16. Mr. A is considering two mutually exclusive investment projects, from following
information select the Project on the basis of standard deviation and co-efficient
of variation method.
Cash Project I Project II
Rs. 15,000. Rs. 15,000
Cash inflow Rs. Probabilities Rs. Probabilities
Year
1 3,000 .3 4,000 .1
2 4,000 .2 6,000 .4
3 7,000 .3 7,000 .3
4 6,000 .2 3,000 .2
17. Mr. X is considering the project an investment of Rs. 26,000. The expensed
returns during the life if the project of are as follows:
Year I Event Cash inflow Probability
a 12,000 .2
b 14,000 .6
c 9,000 .2
Year II
Cash inflows is year I are.
Rs. 12,000 Rs. 14,000 Rs. 9,000
Cash inflow Probability Cash inflow Probability Cash inflow Probability
1 18,000 .3 22,000 .2 28,000 .4
2 20,000 .4 26,000 .7 32,000 .5
3 20,000 .3 30,000 .1 35,000 .1
Using 10% as the use of capital, advise about the acceptability of the proposal.
