Capital Budgeting.pptx
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This document discusses capital budgeting techniques for evaluating risky projects, including the certainty equivalent approach and risk adjusted discount rates. It provides 6 questions with cash flow information for multiple projects over several years along with probabilities. It asks to calculate the expected net present value of the projects using a 10% discount rate and certainty equivalent coefficients to determine the preferable project based on risk and return.
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The document provides cash flow information for 5 projects (Projects A, B, C, D and E) being considered by Alpha Limited for the years 2003 to 2006. It mentions that the company's cost of capital is 12% and all projects are divisible with no limitations on funds in subsequent years after 2003 which has a capital limitation of Rs. 110,000. The assistant is asked to calculate which project Alpha Limited should undertake based on the cash flow information and present value factors provided for 2003 to 2006.
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The document discusses capital budgeting and investment project evaluation. It states that when projects deliver discounted cash flows exceeding investment costs, shareholder value increases through stock price appreciation. Several capital budgeting techniques are described like net present value, internal rate of return, payback period. Risk analysis methods in capital budgeting are also covered like sensitivity analysis, scenario analysis and Monte Carlo simulation to incorporate risk.
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The document discusses capital budgeting and investment project evaluation. It states that when projects are undertaken that are expected to generate discounted cash flows exceeding the initial investment, it increases the economic value of the company and benefits shareholders through stock price appreciation. It also briefly describes several capital budgeting techniques used to evaluate projects, such as payback period, net present value, internal rate of return, and discounted payback period.
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The document discusses capital budgeting and investment project evaluation. It states that when projects deliver discounted cash flows exceeding investment costs, shareholder value increases through stock price appreciation. Several capital budgeting techniques are described like net present value, internal rate of return, payback period. Risk analysis methods in capital budgeting like sensitivity analysis and scenario analysis are also covered.
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This document contains information about sensitivity analysis and decision tree analysis for capital budgeting. It provides details of three projects, including initial costs, cash inflows, project life, and cost of capital. It asks to analyze how sensitive each project's NPV is to 10% and 15% adverse changes in key variables. It also provides two examples of decision trees showing cash flow probabilities for projects over multiple years and asks to calculate NPV using the trees. The goal is to use sensitivity analysis and decision tree approaches to evaluate investment project risk and returns.
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The document discusses two approaches to evaluating risky projects in capital budgeting: the risk adjusted discount rate approach and the certainty equivalent approach. It provides examples of how to apply each approach, including a table of cash flows for two proposals being evaluated with the risk adjusted discount rate approach and a table of expected cash flows and certainty equivalent quotients for a project being evaluated with the certainty equivalent approach. It asks which proposal should be acceptable to the company using the risk adjusted approach and whether the project should be accepted using the certainty equivalent approach.
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Capital budgeting is the process of evaluating long-term investments to maximize shareholder wealth. It involves assessing projects that require fixed assets operating for over one year. The key evaluation techniques are payback period, net present value (NPV), and internal rate of return (IRR), with NPV preferred as it considers total cash flows over time. NPV accepts projects when the present value of inflows exceeds outflows, while IRR accepts projects when the rate of return exceeds the cost of capital.
Top of Form 1.The difference between the present value.docx
Top of Form
1.
The difference between the present value of an investment?s future cash flows and its initial cost is the:
net present value.
internal rate of return.
payback period.
profitability index.
discounted payback period.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
2.
Which statement concerning the net present value (NPV) of an investment or a financing project is correct?
A financing project should be accepted if, and only if, the NPV is exactly equal to zero.
An investment project should be accepted only if the NPV is equal to the initial cash flow.
Any type of project should be accepted if the NPV is positive and rejected if it is negative.
Any type of project with greater total cash inflows than total cash outflows, should always be accepted.
An investment project that has positive cash flows for every time period after the initial investment should be accepted.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
3.
The primary reason that company projects with positive net present values are considered acceptable is that:
they create value for the owners of the firm.
the project's rate of return exceeds the rate of inflation.
they return the initial cash outlay within three years or less.
the required cash inflows exceed the actual cash inflows.
the investment's cost exceeds the present value of the cash inflows.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
4.
Accepting a positive net present value (NPV) project:
indicates the project will pay back within the required period of time.
means the present value of the expected cash flows is equal to the project’s cost.
ignores the inherent risks within the project.
guarantees all cash flow assumptions will be realized.
is expected to increase the stockholders’ value by the amount of the NPV.
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Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
5.
The net present value method of capital budgeting analysis does all of the following
except:
incorporate risk into the analysis.
consider all relevant cash flow information.
use all of a project's cash flows.
discount all future cash flows.
provide a specific anticipated rate of return.
References
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Section: 5.1 Net Present Value and Other Investment Rules
6.
What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.
−$287.22
−$1,195.12
−$1,350.49
$204.36
$797.22
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Section: 5.1 Net Present Value and Other Investment Rules
7.
Maxwell Software, Inc., has the following mutually exclusive projects.
Year
Project A
Project B
0
–$29,000
–$32,000
1
16,500
17,500
2
13,000
11,500
3
3,800
13,000
a-1.
Calculate the payback period for each project.
(Do not round interme ...
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The document provides cash flow information for 5 projects (Projects A, B, C, D and E) being considered by Alpha Limited for the years 2003 to 2006. It mentions that the company's cost of capital is 12% and all projects are divisible with no limitations on funds in subsequent years after 2003 which has a capital limitation of Rs. 110,000. The assistant is asked to calculate which project Alpha Limited should undertake based on the cash flow information and present value factors provided for 2003 to 2006.
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The document discusses capital budgeting and investment project evaluation. It states that when projects deliver discounted cash flows exceeding investment costs, shareholder value increases through stock price appreciation. Several capital budgeting techniques are described like net present value, internal rate of return, payback period. Risk analysis methods in capital budgeting are also covered like sensitivity analysis, scenario analysis and Monte Carlo simulation to incorporate risk.
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The document discusses capital budgeting and investment project evaluation. It states that when projects are undertaken that are expected to generate discounted cash flows exceeding the initial investment, it increases the economic value of the company and benefits shareholders through stock price appreciation. It also briefly describes several capital budgeting techniques used to evaluate projects, such as payback period, net present value, internal rate of return, and discounted payback period.
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The document discusses capital budgeting and investment project evaluation. It states that when projects deliver discounted cash flows exceeding investment costs, shareholder value increases through stock price appreciation. Several capital budgeting techniques are described like net present value, internal rate of return, payback period. Risk analysis methods in capital budgeting like sensitivity analysis and scenario analysis are also covered.
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This document contains information about sensitivity analysis and decision tree analysis for capital budgeting. It provides details of three projects, including initial costs, cash inflows, project life, and cost of capital. It asks to analyze how sensitive each project's NPV is to 10% and 15% adverse changes in key variables. It also provides two examples of decision trees showing cash flow probabilities for projects over multiple years and asks to calculate NPV using the trees. The goal is to use sensitivity analysis and decision tree approaches to evaluate investment project risk and returns.
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The document discusses two approaches to evaluating risky projects in capital budgeting: the risk adjusted discount rate approach and the certainty equivalent approach. It provides examples of how to apply each approach, including a table of cash flows for two proposals being evaluated with the risk adjusted discount rate approach and a table of expected cash flows and certainty equivalent quotients for a project being evaluated with the certainty equivalent approach. It asks which proposal should be acceptable to the company using the risk adjusted approach and whether the project should be accepted using the certainty equivalent approach.
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Capital budgeting is the process of evaluating long-term investments to maximize shareholder wealth. It involves assessing projects that require fixed assets operating for over one year. The key evaluation techniques are payback period, net present value (NPV), and internal rate of return (IRR), with NPV preferred as it considers total cash flows over time. NPV accepts projects when the present value of inflows exceeds outflows, while IRR accepts projects when the rate of return exceeds the cost of capital.
Top of Form 1.The difference between the present value.docx
Top of Form
1.
The difference between the present value of an investment?s future cash flows and its initial cost is the:
net present value.
internal rate of return.
payback period.
profitability index.
discounted payback period.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
2.
Which statement concerning the net present value (NPV) of an investment or a financing project is correct?
A financing project should be accepted if, and only if, the NPV is exactly equal to zero.
An investment project should be accepted only if the NPV is equal to the initial cash flow.
Any type of project should be accepted if the NPV is positive and rejected if it is negative.
Any type of project with greater total cash inflows than total cash outflows, should always be accepted.
An investment project that has positive cash flows for every time period after the initial investment should be accepted.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
3.
The primary reason that company projects with positive net present values are considered acceptable is that:
they create value for the owners of the firm.
the project's rate of return exceeds the rate of inflation.
they return the initial cash outlay within three years or less.
the required cash inflows exceed the actual cash inflows.
the investment's cost exceeds the present value of the cash inflows.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
4.
Accepting a positive net present value (NPV) project:
indicates the project will pay back within the required period of time.
means the present value of the expected cash flows is equal to the project’s cost.
ignores the inherent risks within the project.
guarantees all cash flow assumptions will be realized.
is expected to increase the stockholders’ value by the amount of the NPV.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
5.
The net present value method of capital budgeting analysis does all of the following
except:
incorporate risk into the analysis.
consider all relevant cash flow information.
use all of a project's cash flows.
discount all future cash flows.
provide a specific anticipated rate of return.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
6.
What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.
−$287.22
−$1,195.12
−$1,350.49
$204.36
$797.22
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
7.
Maxwell Software, Inc., has the following mutually exclusive projects.
Year
Project A
Project B
0
–$29,000
–$32,000
1
16,500
17,500
2
13,000
11,500
3
3,800
13,000
a-1.
Calculate the payback period for each project.
(Do not round interme ...
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The document discusses various capital budgeting techniques for investment decision making including net present value (NPV), benefit-cost ratio (BCR), internal rate of return (IRR), payback period, and accounting rate of return (ARR). Examples are provided to illustrate how to use the techniques to evaluate potential projects. The key criteria are NPV (accept if greater than 0), BCR (accept if greater than 1), IRR (accept if greater than required rate of return), and payback period (accept if less than cutoff period).
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Understand the nature and importance of investment decisions.
Distinguish between discounted cash flow (DCF) and non-discounted cash flow (non-DCF) techniques of investment evaluation.
Explain the methods of calculating net present value (NPV) and internal rate of return (IRR).
Show the implications of net present value (NPV) and internal rate of return (IRR).
Describe the non-DCF evaluation criteria: payback and accounting rate of return and discuss the reasons for their popularity in practice and their pitfalls.
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Describe the merits and demerits of the DCF and Non-DCF investment criteria.
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3.Quantitative Problem Bellinger Industries is considering two .docx
3.
Quantitative Problem:
Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%.01234 Project A-1,010630310270320Project B-1,010230245420770
What is Project A's NPV? Round your answer to the nearest cent. Do not round intermediate calculations.
$
What is Project B's NPV? Round your answer to the nearest cent. Do not round intermediate calculations.
$
If the projects were independent, which project(s) would be accepted?
-Select-NeitherProject AProject BBoth projects A and BCorrect 1 of Item 3
If the projects were mutually exclusive, which project(s) would be accepted?
4.
Quantitative Problem:
Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 10%.01234 Project A-1,200630330290350Project B-1,200230265440800
What is Project A’s IRR? Do not round intermediate calculations. Round your answer to two decimal places.
%
What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places.
%
If the projects were independent, which project(s) would be accepted according to the IRR method?
-Select-NeitherProject AProject BBoth projects A and BCorrect 1 of Item 3
If the projects were mutually exclusive, which project(s) would be accepted according to the IRR method?
-Select-Neither Project AProject BBoth projects A and BCorrect 2 of Item 3
Could there be a conflict with project acceptance between the NPV and IRR approaches when projects are mutually exclusive?
-Select-YesNoCorrect 3 of Item 3
The reason is
-Select-the NPV and IRR approaches use the same reinvestment rate assumption so both approaches reach the same project acceptance when mutually projects are considered.the NPV and IRR approaches use different reinvestment rate assumptions so there can be a conflict in project acceptance when mutually exclusive projects are considered.Correct 4 of Item 3
Reinvestment at the
-Select-IRRWACCCorrect 5 of Item 3
is the superior assumption, so when mutually exclusive projects are evaluated the
-Select-NPVIRRCorrect 6 of Item 3
approach should be used for the capital budgeting decision.
5.
Quantitative Problem:
Bellinger Industries is considering two projects for inclusion.
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Capital budgeting
The document discusses various topics related to investment decisions and capital budgeting. It defines capital expenditures and discusses factors like cost of acquisition, addition/expansion costs, and R&D costs. It also summarizes various capital budgeting techniques like payback period, accounting rate of return, net present value, internal rate of return, and profitability index. Key evaluation criteria for investment decisions include NPV, IRR, and reconsider assumptions. The document also highlights potential conflicts between NPV and IRR methods.
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The document discusses capital budgeting, which refers to the process companies use to evaluate major investments. It defines capital budgeting as evaluating purchases of fixed assets using current funds. The capital budgeting process involves generating projects, evaluating them, selecting projects, and follow up. Methods to evaluate projects include payback period, accounting rate of return, net present value, and profitability index. These methods use calculations involving initial investments, expected cash flows, discount rates, and time value of money to determine which projects will be most profitable.
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The document discusses capital budgeting, which refers to investment decisions organizations make regarding large capital projects or assets. It covers several key aspects of capital budgeting including: the importance of these decisions given factors like large amounts of money involved and long-term impact; various capital budgeting techniques used to evaluate projects like payback period, net present value (NPV), and internal rate of return (IRR); and how to apply these techniques to calculate metrics and determine which projects to accept.
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Understand the nature and importance of investment decisions.
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3.
Quantitative Problem:
Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%.01234 Project A-1,010630310270320Project B-1,010230245420770
What is Project A's NPV? Round your answer to the nearest cent. Do not round intermediate calculations.
$
What is Project B's NPV? Round your answer to the nearest cent. Do not round intermediate calculations.
$
If the projects were independent, which project(s) would be accepted?
-Select-NeitherProject AProject BBoth projects A and BCorrect 1 of Item 3
If the projects were mutually exclusive, which project(s) would be accepted?
4.
Quantitative Problem:
Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 10%.01234 Project A-1,200630330290350Project B-1,200230265440800
What is Project A’s IRR? Do not round intermediate calculations. Round your answer to two decimal places.
%
What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places.
%
If the projects were independent, which project(s) would be accepted according to the IRR method?
-Select-NeitherProject AProject BBoth projects A and BCorrect 1 of Item 3
If the projects were mutually exclusive, which project(s) would be accepted according to the IRR method?
-Select-Neither Project AProject BBoth projects A and BCorrect 2 of Item 3
Could there be a conflict with project acceptance between the NPV and IRR approaches when projects are mutually exclusive?
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The reason is
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Reinvestment at the
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approach should be used for the capital budgeting decision.
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Capital budgeting involves planning expenditures for long-term assets that provide returns over several years. It is an important process that requires evaluating projects carefully due to their large size, long-term implications, and irreversible nature. Key aspects of capital budgeting include identifying and evaluating investment proposals, determining which provide the highest expected rates of return, and preparing a capital expenditure budget. Various techniques can be used to evaluate projects, including payback period, accounting rate of return, net present value, internal rate of return, and risk-adjusted methods that account for uncertainty in projected cash flows.
Introduction To Capital Budgeting Techniques.ppt
This document discusses capital budgeting techniques for evaluating investment projects. It introduces discounted cash flow methods including net present value (NPV), internal rate of return (IRR), and profitability index (PI). For each method, it provides the calculation approach and explains that projects should be accepted if the result is above a required rate of return. The document reviews the strengths and weaknesses of each approach and notes there are some cases where one technique may be preferred over others or require adjustment.
Capital budgeting
This document discusses various capital budgeting techniques used to evaluate business investment projects, including net present value (NPV), internal rate of return (IRR), profitability index (PI), payback period, and average rate of return (ARR). It provides examples of how to calculate each metric and explains the appropriate decision rules and limitations of each approach.
measurement-of-project-risk-yG8P.pptx
This document discusses various methods for analyzing risk in capital budgeting decisions, including sensitivity analysis and scenario analysis. It begins by defining risk and different sources of uncertainty that can influence a project's future cash flows. It then covers measuring risk through tools like standard deviation, beta, and the certainty equivalent method. Sensitivity analysis and scenario analysis are presented as ways to assess how changes in assumptions may impact project outcomes. Sensitivity analysis involves changing one variable at a time, while scenario analysis considers alternative outcomes based on defined scenarios like best, worst, and base cases. The document provides examples of applying these risk analysis techniques in capital budgeting evaluations.
Capital budgeting
The document discusses various topics related to investment decisions and capital budgeting. It defines capital expenditures and discusses factors like cost of acquisition, addition/expansion costs, and R&D costs. It also summarizes various capital budgeting techniques like payback period, accounting rate of return, net present value, internal rate of return, and profitability index. Key evaluation criteria for investment decisions include NPV, IRR, and reconsider assumptions. The document also highlights potential conflicts between NPV and IRR methods.
Risk analysis in investment
This document discusses risk analysis in investment. It defines risk as the potential for losing value and discusses different types of risk like financial risk and project-specific risk. It also outlines various techniques used for risk analysis like sensitivity analysis, probability distribution approach, and payback period. As an example, it shows how adjusting the discount rate for risk can impact a project's net present value. Overall, the document provides an overview of risk analysis in investments, outlining key concepts like different risk types and techniques used to evaluate risk.
Capital budgeting
The document discusses capital budgeting, which refers to the process companies use to evaluate major investments. It defines capital budgeting as evaluating purchases of fixed assets using current funds. The capital budgeting process involves generating projects, evaluating them, selecting projects, and follow up. Methods to evaluate projects include payback period, accounting rate of return, net present value, and profitability index. These methods use calculations involving initial investments, expected cash flows, discount rates, and time value of money to determine which projects will be most profitable.
Capital budgeting latest
The document discusses capital budgeting, which refers to investment decisions organizations make regarding large capital projects or assets. It covers several key aspects of capital budgeting including: the importance of these decisions given factors like large amounts of money involved and long-term impact; various capital budgeting techniques used to evaluate projects like payback period, net present value (NPV), and internal rate of return (IRR); and how to apply these techniques to calculate metrics and determine which projects to accept.
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Chapter-1
Introduction to objective, scope and outcome the subject
Chapter 2
Introduction: Scope and Specialization of Civil Engineering, Role of civil Engineer in Society, Impact of infrastructural development on economy of country.
Chapter 3
Surveying: Object Principles & Types of Surveying; Site Plans, Plans & Maps; Scales & Unit of different Measurements.
Linear Measurements: Instruments used. Linear Measurement by Tape, Ranging out Survey Lines and overcoming Obstructions; Measurements on sloping ground; Tape corrections, conventional symbols. Angular Measurements: Instruments used; Introduction to Compass Surveying, Bearings and Longitude & Latitude of a Line, Introduction to total station.
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Chapter 6
Environmental Engineering: Environmental Pollution, Environmental Acts and Regulations, Functional Concepts of Ecology, Basics of Species, Biodiversity, Ecosystem, Hydrological Cycle; Chemical Cycles: Carbon, Nitrogen & Phosphorus; Energy Flow in Ecosystems.
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2. Satheesh Gopi, Basic Civil Engineering, Pearson Publishers.
3. Ketki Rangwala Dalal, Essentials of Civil Engineering, Charotar Publishing House.
4. BCP, Surveying volume 1
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- 1. Capital Budgeting Probability, Certainty Equivalent Approach, Risk Adjusted Discount Rate
- 2. Qn 1 Possible net cash flows of Projects A and B at the end of first year and their probabilities are given below. Discount rate is 10 per cent. For both the projects, initial investment is Rs.10,000. CALCULATE the expected net present value for each project. STATE which project is preferable. PossibleEvent Project A Project B Cash Flow Probability Cash Flow Probability A 8,000 0.10 24,000 0.10 B 10,000 0.20 20,000 0.15 C 12,000 0.40 16,000 0.50 D 14,000 0.20 12,000 0.15 E 16,000 0.10 8,000 0.10
- 3. Qn 2 Probabilities for net cash flows for 3 years of a project are below CALCULATE the expected net present value of the project using 10 per cent discount rate if the Initial Investment of the project is Rs.10,000 Year 1 Year 2 Year 3 Cash Flow Probability Cash Flow Probability Cash Flow Probability 2,000 0.1 2,000 0.2 2,000 0.3 4,000 0.2 4,000 0.3 4,000 0.4 6,000 0.3 6,000 0.4 6,000 0.2 8,000 0.4 8,000 0.1 8,000 0.1
- 4. Qn 3 If Investment proposal costs Rs.45,00,000 and risk free rate is 5%, CALCULATE net present value under certainty equivalent technique. Year Expected cash flow Certainty Equivalent coefficient 1 10,00,000 0.90 2 15,00,000 0.85 3 20,00,000 0.82 4 25,00,000 0.78
- 5. Qn 4 A company employs certainty equivalent approach in the evaluation of risky investments. The capital budgeting department has developed the following information Year Expected cash flow Certainty Equivalent coefficient 0 -200 1 1 160 0.8 2 140 0.7 3 130 0.6 4 120 0.4 5 80 0.3
- 6. Qn 5 A company is considering two mutually exclusive projects. Amounts in lakhs The risk free rate of return is 9%, cost of capital is 13%, risk adjusted discount rate is 16%. Which project should be accepted Year Project X Certainty Equivalents Project Y Certainty Equivalents 0 -40 1 -45 1 1 14.25 0.95 22.50 0.90 2 15.30 0.85 16.00 0.80 3 14.00 0.70 17.50 0.70 4 13.00 0.65 10.80 0.60
- 7. Qn 6 A company is considering an investment in one of the two mutually exclusive proposals. The risk less rate is considered as 5% Project A : Initial outlay of Rs.170,000/- Project B : Initial outlay of Rs. 150,000/- a) Which project should be acceptable? b) Which project is riskier? c) If risk adjusted discount rate method, which project would be analyzed with higher rate? Year Project A Certainty Equivalents Project B Certainty Equivalents 1 90,000 0.8 90,000 0.90 2 100,000 0.70 90,000 0.80 3 110,000 0.5 100,000 0.6