Answer Posted / m.s.s.v.sri kumar
Budgeting for longterm resources may be termed as Capital
budgeting. Decisions for accepting certain project can also
be termed as capital budgeting. There are two models in
capital budgeting. 1) Traditional and 2) Modern.
Under the Traditional model the capital budgeting can
be done on 1) Pay back period method and 2) Accounting
rate of return method (ARR)
Under Modern technique model it can be done on 1) Net
present value method; 2) Profitability Index method; 3)
Internal Rate of Return method. (IRR)
| Is This Answer Correct ? | 20 Yes | 0 No |
Post New Answer View All Answers
What Is A Put Option?
What is the basic difference between a cheque and a draft?
What idea do you have about the Banking Industry?
Differentiate between shares and mutual funds?
Which was the first indian bank to get an iso certification?
What do you know about PACs?
Read the case given below and answer the questions given at the end. Krutika Designers Ltd is an Indian company engaged in designing shirts for an international shirt manufacturer. Its operations are currently restricted to designing shirts for the Indian market. The firm is interested in extending its operations to the European markets, but is restricted by its lack of knowledge about the latest fashions and trends prevailing there. Hence, the firm has decided to open an office in Finland for establishing a network in Europe that will give the firm access to the needed information. The firm feels that its does not have the capability of sustaining itself in the foreign markets in the long-term, and will be able to generate additional revenue from these activities only for the next 5 years. After that, the Finnish office will have to be closed down. The firm anticipates an initial investment of Rs.14 million. The project is expected to generate the following cash flows over the 5 years period. Year Cash flow (Finnish Marks) 1 2 3 4 5 10,00,000 20,00,000 50,00,000 50,00,000 30,00,000 These cash flows are expressed in terms of today’s money. The firm can claim depreciation in India according to the Straight Line Method. The salvage value from the project is expected to be nil. The Finnish Government does not provide any incentives for foreign investments. However, currently it is making an attempt to have better economic ties with India. Hence, it has decided to extend a loan of 50,000 marks to Krutika Designers. The loan will be at a concessional interest rate of 7%. The loan is to be repaid in 5 equal annual installments which will include the interest payments. The project will generate additional borrowing capacity of Rs.5 million for the firm. However, as the firm does not have any firm contract with the international shirt manufacturer, its domestic revenues are expected to be very volatile. Therefore, there is no surely that the firm will be able to absorb the tax benefits arising out of depreciation and additional borrowing capacity. The firm does not intend to indulge in any illegal money transfers. The current spot rate for the Finnish Mark is Rs.7.25/FM. The inflation rates in India and Finland for the next 5 years are expected to be 8% and 3% respectively. The exchange rate is expected to move in tandem with the inflation rates. Indian tax rate is 35% while Finnish tax rate is 40%. India and Finland have entered into a tax treaty whereby the earnings of the residents of one country are taxable in that country only. In India, the nominal risk-free interest rate is 11%. The same is 6% in Finland. The Indian nominal interest rate (including risk-premium) is 15%, while that in Finland is 9%. The nominal all-equity rate in India is 18%. 1. Comment on the financial viability of the project. 2. What are the different circumstances in which nominal all-equity discount rate and real all equity discount rate should be used for discounting the cash flows? Explain the rationale behind it. 3. Comment on the financial viability of the project if the firm is sure about being able to absorb the tax benefits arising out of depreciation and increased borrowing capacity. 4. Explain the concept of exchange risk and how it affects an international project. 5. How can the financial structure of a project be used to overcome repatriation restrictions? What are the additional benefits of such maneuvers?
Tell us something important to you?
i have done BSc(I.T). i now wish to pursue MBA i finance. my interview is on Saturday.what do i tell them if they ask me why do i want to do my MBA after BSc(I.T)?someone please help me out
Do you know the difference between Balance of payment and Balance of Trade?
Who is the investment banker?
What are the different types of taxes imposed by the government?
Do you know about winners of various Awards?
Explain profitability group ratios.
What is Cheque Discount?
