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Financial Management : Part-2

Short Notes: Financial Management (Part-2)

» What is certainty equivocation (CE)?
Answer: Ails: The amount of cash someone would require with certainty at a point in time to make the individual indifference between that certain amount and amount expected to receive with risk at the same point of time.

» What is sensitivity analysis?
Answer: Sensitivity analysis indicates exactly how much NPV will change in response to given change in an input variable, other things held constant.

» What is probability?
Answer: The chance that a given outcome will occur.

» What is range?
Answer: A measure of asset risk which is found by subtracting the pessimistic (worst) outcome from the optimistic (best) outcome.

» What is an opportunity cost?
Answer: What is lost by not taking the next best investment alternative. For example, if the project requires the use of a building which could otherwise be sold, the market value of the building is an opportunity cost of the project.

» What is sunk cost?
Answer: A sunk cost is one that has already occurred and is not affected by the capital project decision. Sunk costs arenot relevant to capital budgeting decisions.

» What is Average Rate of Return?
Answer: The International Rate of Return is capital budgeting method that companies average after tax net cash inflow to average investment.

» What is Internal Rate of Return?
Answer: Internal Rate of Return is the discount rate that equates the sum of the present values of series cash inflows with the initial investment.

» What ids Profitability Index?
Answer: Profitability Index be defined as the ratio which is obtained by dividing the sum of present value of future cash inflows by the present of the cash outlay.

» What is Capital Rationing?
Answer: The Capital Rationing refers to the choice of investment proposals under financial constraints in terms of a given size of capital.


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