Question

1.Capital budgeting can be defined as analyzing alternative long-term investments and deciding which assets may be acquired. T F

2.Limited funds being available for investment purposes is never a consideration in firm making an investment decision. T F

3.In the investment decision making process, the time value of money should be given consideration. T F

4.The net present value process can be defined as a comparison of the present value of cash inflows with the present value of cash outflows. T F

5.If the net present value of a project is a positive figure this would indicate that the investment should made. T F

Answer 1

Answer 1 :

This statement is True.

Capital Budgeting can be defined as analyzing alternative long-term investments and deciding which assets may be acquired. It is a process in which we analyses various alternatives of long term investment and from those alternatives chose the best investment as per the return with the funds available to invest.

Answer 2 :

This statement is False.

A firm may have limited funds and various investment alternatives. In such a case firm should select the combination of investments that will yield the great profitability for the firm. Therefore the statement is False that firm will never consider for the investment decision.

Answer 3 :

This statement is True.

In the investment decision making process, the time value of money should be given consideration. When we consider a particular investment suppose investing in the bonds of a company then we will first calculate the present values of future cash flows that we will receive by investing in that bond. For eg interest etc. and that present value of futures cash flows gives us the true price of that bond ( investment ) today and we can make the investment decision accordingly.

Answer 4 :

This statement is True.

The net present value process can be defined as a comparison of the present value of cash inflows with the present value of cash outflows. Whenever we starts any project we need to incur some expenditures like capital expenditures etc. and then we will earn cash flows in the future. To decide whether to invest in the project or not we need to calculate Net Present Value ( NPV ) of the project which is calculated by using present value of cash outflows and present value of cash inflows.

Answer 5 :

This statement is True.

If the net present value of a project is a positive figure this would indicate that the investment should made. While making investment decision we calculate the Net present value of the project which is calculated as follows:

Net present value = Present value of Cash Inflows - Present value of cash outflows.

If this comes positive that means Present value of cash inflows are more than the outflows therefore investment is profitable and investment should be made.