ECONOMICS

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COST ACCOUNTING

CAPITAL BUDGETING

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Assume that a project consists of an initial cash outlay of P100, 000 followed by equal annual cash inflows of P40, 000 for 4 years. In the formula X = P100, 000/P40, 000, X represents the
A
payback period for the project.
B
profitability index of the project.
C
internal rate of return for the project.
D
project’s discount rate.
Explanation: 

Detailed explanation-1: -The Net Present Value (NPV) method involves discounting a stream of future cash ows back to present value. The cash ows can be either positive (cash received) or negative (cash paid).

Detailed explanation-2: -Formula. Initial cash flows = FC+WC-S + (S-B) * T Here, FC = fixed capital, WC = working capital, S = Salvage value, B = Book value, T = Tax rate.

Detailed explanation-3: -The initial outlay is the initial cash flow which is required in the year 0 for a given project. Along with the initial project costs, this is usually the largest cash flow in a given project.

Detailed explanation-4: -The modified internal rate of return (MIRR) is a better indicator of a project’s true profitability because: it assumes that the cash flows are reinvested at the required rate of return.

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