3.Explain what capital budgeting is and why it is used. 4.Explain the benefits o

Question

3.Explain what capital budgeting is and why it is used.

4.Explain the benefits of Profitability Index instead of NPV method

5. Explain why payback period is a limited method.

6. Given the following returns on an investment: 12%, 14%, 10%, 9%, 8% and 6%

a.Calculate the variance

b. Calculate the standard deviation

7. Given the following returns on an investment: 10%, 24%, 10%, 6%, 18% and 6%

a.Calculate the variance

b. Calculate the standard deviation

8. Which investment has greater risk - that in question 6 or question 7?

Explanation / Answer

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3)

Capital budgeting is a project evaluation technique in which a project is analyzed for its viability in the form of projected returns and then the future cash flows are evaluated as a present value to ascertain whether the desired rate of return is achieved or not.

Capital budgeting is used to select best project among a group of alternatives and find which one gives the best returns so that maximum utilization of financial capital can be made.

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