Capital Budget and Risk Analysis

1. What is budget?
Ans: Budget is a blue-print of plan of action to be followed during a specified period of time for attaining some decided objectives.

2. What do you mean by Capital budgeting
Ans: Capital budgeting is a process of identifying, analyzing (f) and selecting investment projects whose return (cash inflows) are expected to extend beyond one year.

3. What is Independent projects?
Ans : Projects whose cash flows are unrelated or independent of another is known as independent – Projects.

4. What projects?
Ans: Mutually exclusive projects are set of projects form which at most one will be accepted.

5.What is return?
Ans. The total gain or loss experienced on a investment over a given period of time, calculated by dividing the assets cash distributions during th period, plus change in value, by its beginning o period investment value.

6. What is certainty equivalution (CE)?
Ans. The amount of cash someone wou require with certainty at a point is time make the individual indifference between th certain amount and amount expected received with risk at the some point of time.

7. What is correlation?
Ans. A statistical measure if relations between any two series of number resenting data of any kind.

8. What is coefficient of variation?
Ans:The ratio of the standard deviation of distribution to the mean of distribution. Itbis mesure a relative risk.

9.Elaborate of CAPM?
Ans:CAPM- Capital Asset Pricing Model.

10. What is Conventional cash flow?
Ans: An initial outflow followed only by a of series of inflows.

11. What is Initial investment?
Ans: The relevant cash outflow from a proposed project at time zero.

12. What is Sunk cost?
Ans: Cash outlays that have already been made of and therefore have no effect on the current cash flows relevant to a current decision.

13. What is Replacement project?
Ans: A replacement project occurs when the firm replaces an existing asset with new one.

14. What is Risk?
Ans: Risk may be defined as the variability of possible out comes from a project.

15. What is Standard deviation?
Ans: SD is a statistical measure of the variability of a distribution around its mean.

16. What is Capital rationing?
Ans: A situation in which a constrain is placed on the total size of the firms

17. What is Scenario analysis?
Ans: Scenario analysis is risk analysis technique in which the best and worst case NPVs are compared with projects expected NPV.

18. What is Worst case scenario?
Ans: An analysis in which all of the input variables are set At their worst reasonably forecasted o values.

19. What is Best-case scenario ?
Ans: An analysis in which all of the input variables are set at their best reasonably forecasted values.

20. What is RADR?
Ans: The risk-adjusted discount rate is the discount-rate which combines time as well as
risk of preference of investors.

21. What is Decision Tree?
Ans A decision tree is pictorial representation in tree from which indicates the magnitude, probability and inter relationship of all possible out comes.

22. What is Probability distribution?
Ans: Probability distribution is a set of possible values that a random variable can assume and their associated probabilities of occurrence

23. What is Sensitivity analysis?
Ans: Sensitivity analysis is a risk analysis techniques that indicates how much NPV will change in response to a given change in an input variable, other things held constant.

24. What is Net present value?
Ans: The present value of an investment-Project’s net cash inflow minus the project’s initial cash outflow.

25. What is Profitability index?
Ans: Pl may be defined as the ratio of present value of cash inflow and outflow.

26. What is Break even cash inflow?
Ans: The minimum level of cash inflow necessary for project to be acceptable is know as break even cash inflow.

27. What is Corporate risk?
Ans : The risk which is measured by the project’s effect on the firm’s earning variability is know as corporate risk.

28. What is Market risk?
Ans: Market risk reflects the effects of a project on the friskiness of the stockholder’s well diversified portfolio.

29. What is the elaboration of RADR?
Ans: RADR = Risk-Adjusted Discount Rate.

30. What is IRR?
Ans: The discount that equates the present value of the future net cash flows from an investment project with the projects initial cash outflows is called IRR(Internal Rate of Return).

31.. What is range?
Ans: A measure of assets risk which is found by subtracting the pessimistic (worst) outcome from the optimistic (best) outcome.

32. What is capital asset pricing model (CAPM)?
Ans: The basic theory that link risk and return for all assets.

33. What is Business Risk?
Ans: Business risk is the possibilities a company will have lower than anticipated profits or experience a loss rather than taking a profit.

34.What is Stand-alone risk?
Ans: The risk which is measured by the variability of the assets expected return is known as stand-alone risk.

35.What is NPV profile?
Ans: A graph showing the relationship between a project’s NPV and the discount rate employed.

36. What is Dependent/Contingent – Project? Ans: A project whose acceptance depends on the acceptance of one or more other projects.

37. What is Hurdle Rate?
Ans: The minimum required rate of return on an investment is known as hurdle rate.

38. What is risk free rate?
Ans: The risk free rate is the theoretical rate of return of an investment with no risk of financial loss.

39. What is risk premium?
Ans: The excess return required from a investment in a likely assets over that require from a risk free investment.

40. What is Dependent / Contingent project?
Ans: A project whose acceptance depends the acceptance of one or more other projects.

41. What is initial probability?
Ans: The initial probabilities are those for outcome in the first period.

42. What is portfolio return?
Ans : Portfolio return is simply the c the expected rates of return for the investments in the portfolio.

43. What is Uncertainty? Ans: Uncerainty raters to the ou given event which are too uns assigned probabiliites.

44. What is probability?
Ans: The chance that a given outcome will occur is called probability.

45. What is NCO?
Ans: NCO – Net Cash Outlay.