Question

1. can you please use your own words to tell me what is the difference between capital budgeting screening decisions and capital budgeting preference decisions?

2. use your own words to tell me what is meant by the term 'time value of money".

3. What is net present value (NPV)? Can it ever be negative? Explain in your own words.

4. How is the project profitability index computed, and what does it measure?

Answer 1

1. Capital budgeting screening decision is whether the project acceptable or not and if firm minimu rate of return is 20% then whether projects will be provided this return on not. If it is providing then Project can be acceptable.

Preference capital budgeting started after capital budgeting screens decision. In preference capital budgeting firm is competing the requirement with the option available.for example a machine multiple option will be searched and best cost saving machine will be accepted for screening decision.

2. Time vale of money refer to by increasing time value of money will be increasing. For example if you have given some money to your friend and he will return the money to you after two years without any interest that mean you lost interest part that you can earn in your bank or invested some where. So by increasing time value of money will be increasing.

3. NPV is net present value that is refer to revenue minus cost. Means cash inflow less cash outflows.if NPV is positive then Project is acceptable and if it is negative then Project not to be acceptance. NPV can be negative due to revenue is less than cost.

4. Project profitability is alternative method for investment analysis. NPV is providing absolute no of investment however project profitability index providing the ratio for the project which can be compare with multiple proposal. The formula for calculating PI is net cash flow from the project divided by intital investment in the project or 1+NPV divided by initial investment required for the projects. If any projects return is more than one then it can be acceptable.