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Investment Decisions Interview Questions & Answers - Learning Mode
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Investment Decisions Interview Questions & Answers - Learning Mode

A determination made by directors and/or management as to how, when, where and how much capital will be spent on investment opportunities. The decision often follows research to determine costs and returns for each option.Investment decisions are often supported by decision tools.

Try Investment Decisions Interview Questions & Answers - Exam Mode

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Investment Decisions Interview Questions & Answers - Learning Mode
Try Investment Decisions Interview Questions & Answers - Exam Mode
Question: state the demerits of accounting rate of return method.

Answer: 1. It ignores time value of money.
2. It does not consider the length of life of the projects.
3. It is not consistent with the firm's objective of maximising the market value of shares.
4. It ignores the fact that the profits earned can be reinvested. Source: CoolInterview.com
Question: State the merits of internal rate of return method.

Answer: 1. Calculation of cost of capital is not a prerequisite for adopting IRR.
2. It is not in conflict with the concept of maximising the welfare of the equity shareholders.
3. It considers cash inflows throughout the life of the project. Source: CoolInterview.com
Question: What are the merits of post- payback profitability method?

Answer: 1. It is based on simple calculations.
2. Less time- consuming.
3. It is easy to follow and even a non- finance executive can also understand the concept.
4. It takes into account the earnings of the project of entire life. Source: CoolInterview.com
Question: State the steps involved in capital budgeting process.

Answer: Capital budgeting involves the following steps:
1. Project Generation
2. Project Evaluation
3. Project Selection
4. Project Execution Source: CoolInterview.com
Question: What is the accept or reject criterion for accounting rate of return method?

Answer: Under this method, all projects, having Accounting rate of return higher than the minimum rate established by management will be considered and those having ARR less than the predetermined rate will be rejected. This method ranks a project as number one, if it has highest ARR, and lowest rank is assigned to the project with the lowest ARR. Source: CoolInterview.com
Question: State the importance of capital budgeting?

Answer: 1. Develop and formulate long-term strategic goals
2. Seek out new investment projects
3. Estimate and forecast future cash flows
4. Facilitate the transfer of information
5. Monitoring and Control of Expenditures
6. Creation of Decision Source: CoolInterview.com
Question: What are the disadvantages of profitability index?

Answer: 1. An estimate about the cost of capital is required so as to calculate the profitability index of a firm.
2. The profitability index of a firm might not, sometimes, provide the correct decision while being used to compare mutually exclusive projects
under consideration. Source: CoolInterview.com
Question: State the factors influencing the capital budgeting.

Answer: Factors influencing the capital budgeting are as follows:
a) Availability of Funds
b) Structure of capital
c) Taxation Policy
d) Government Policy
e) Lending policies of financial institutions
f) Immediate need of the Project
g) Earnings
h) Capital Return
i) Economic value of the project
j) Working Capital
k) Accounting Practice
l) Trend of earnings Source: CoolInterview.com
Question: What is the decision rule for profitability index?

Answer: Accept a project if the profitability index is greater than 1, stay indifferent if the profitability index is zero and don't accept if the profitability index is below 1. Source: CoolInterview.com
Question: What are the advantages of profitability index?

Answer: 1. The profitability index tells about an investment or decreasing the firm's value.
2. The profitability index takes into consideration all cash flows of the project.
3. The profitability index takes the time value into consideration.
4. The profitability index also considers the risk involved in future cash flows with the help of cost of capital.
5. The profitability index is also helpful in ranking and picking projects while rationing of capital. Source: CoolInterview.com
Question: State the demerits of payback period method.

Answer: 1. It is based on the principle of 'rule of thumb'.
2. It does not recognise the importance of 'time value of money'.
3. It does not recognise the pattern of cash flows and its timing.
4. Payback period concept does not reflect all the relevant dimensions of profitability.
5. It does not consider the profitability of economic life of the project. Source: CoolInterview.com
Question: State the methods of appraisal of capital budgeting?

Answer: The methods of appraisal of capital budgeting can be categorised as follows:
1. Traditional Methods:-
a) Payback period method
b) Accounting rate of return method
2. Discounted Cash Flow Methods
a) The net present value method
b) Internal rate of return
c) Profitability index method or Benefit cost ratio method. Source: CoolInterview.com
Question: State the demerits of Net Present Value method.

Answer: 1. NPV method is based on discount rate. In a real- life situation, it is very difficult to find and understand the concept of cost of capital.
2. It may not give reliable answers when dealing with alternative projects under the conditions of unequal lives of project.
3. Decision arrived at may not be satisfactory, and when the project being compared involve different amount of investment. Source: CoolInterview.com
Question: What are the steps involved in net present value method?

Answer: 1. An appropriate rate of interest should be selected to discount cash flows. Generally, it is referred to the cost of capital.
2. The present value of cash inflow will be calculated using this discount rate.
3. The discounted cash inflow are used to find its difference with original investment or cash outflows. Source: CoolInterview.com
Question: What are the features of capital budgeting decisions?

Answer: a) Lifetime Decisions
b) Exchange of funds for future benefits.
c) Long term investment activities.
d) Associated with risks and uncertainty.
e) Irreversible in nature.
f) Lifetime decisions Source: CoolInterview.com
Question: State the factors influencing the capital budgeting.

Answer: Factors influencing the capital budgeting are as follows:
a) Availability of Funds
b) Structure of capital
c) Taxation Policy
d) Government Policy
e) Lending policies of financial institutions
f) Immediate need of the Project
g) Earnings
h) Capital Return
i) Economic value of the project
j) Working Capital
k) Accounting Practice
l) Trend of earnings Source: CoolInterview.com
Question: What is the accept or reject criterion for net present value method.

Answer: Net present value is used as an accept or reject criteria. In case NPV is positive the project is selected for investment. If NPV is negative, the project is rejected.
If NPV> Zero- Accept; If NPV< Zero- Reject. Source: CoolInterview.com
Question: State the merits of net present value method.

Answer: 1. It recognises the time value of money.
2. It considers the cash inflow of the entire project.
3. It is consistent with the objective of maximising the welfare of owners.
4. It estimates the present value of their cash flows by using a discount rate equal to the cost of capital. Source: CoolInterview.com
Question: What are the merits of payback period?

Answer: 1. It is a traditional and old method.
2. It involves simple calculation.
3. Selection or rejection of the project can be made easily.
4. The results obtained under this method is more reliable.
5. It is the best method for evaluating high- risk projects. Source: CoolInterview.com
Question: What is payback period?

Answer: The payback period refers to the period in which the project will generate the necessary cash to recover the initial investment. It is a traditional, simple method of evaluating the projects. It does not take the effect of time value of money.
Payback Period= Original investment of the project/ Annual cash inflow of the project. Source: CoolInterview.com

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