Question

Question: Defining capital investment terms

Fill in each statement with the appropriate capital investment analysis method:

Payback, ARR, NPV, or IRR. Some statements may have more than one answer.

1. _____ is (are) more appropriate for long-term investments.
2. _____ highlights risky investments.
3. _____ shows the effect of the investment on the company’s accrual-based income.
4. _____ is the interest rate that makes the NPV of an investment equal to zero.
5. _____ requires management to identify the discount rate when used.
6. _____ provides management with information on how fast the cash invested will be recouped.
7. _____ is the rate of return, using discounted cash flows, a company can expect to earn by investing in the asset.
8. _____ does not consider the asset’s profitability.
9. _____ uses accrual accounting rather than net cash inflows in its computation.

Short answer

Answer

1. NPV and IRR
2. Payback
3. ARR
4. IRR
5. NPV
6. Payback
7. IRR
8. Payback
9. ARR

Step-by-step solution

Meaning of Capital Investment

Capital investment is money used to help a firm achieve its goals or purchase long-term resources. In a business setting, the term "capital investment" is used in two different ways. The first concerns funds allocated to assist the firm in achieving its objectives. The second category includes cash spent on acquiring fixed assets for the company rather than funds employed for day-to-day operations.

Fill each statement with the appropriate capital investment analysis method

S.no.	Statements	Capital analysis method	Explanation
a.	Is (are) more appropriate for long-term investments.	NPV and IRR	The IRR is employed to calculate a venture’s productivity by employing a rate figure. The NPV is the contrast company's display esteem of cash inflow and outflow over a given period. These two capital budgeting models are suitable for long-term ventures.
b.	Highlights risky investments.	Payback	This procedure tells the administration how rapidly they may recover their investment. It underscores the excessively hazardous investment owing to the expanded payback time, but it does not give data approximately the venture's benefit.
c.	Shows the effect of the investment on the company’s accrual-based income.	ARR	ARR depicts the effect of the investment on the company's accrual-based income. The accounting rate of return could be a proportion that does not consider the thought of time worth of cash.
d.	Is the interest rate that makes the NPV of an investment equal to zero.	IRR	The interest rate at which the NPV of an investment rises is known as the IRR. The IRR could be a capital budgeting strategy used to decide investment productivity. A rebate rate produces the net display value (NPV) of all cash streams from venture zero.
e.	requires management to identify the discount rate when used	NPV	Management must choose the discount rate when using the NPV approach for capital rationing. In investment planning and capital budgeting, the NPV is used to assess the profitability of a proposed investment.
f.	Provides management with information on how fast the cash invested will be recouped.	Payback	The payback period informs management about how quickly the money invested will be repaid.
g.	is the rate of return, using discounted cash flows, a company can expect to earn by investing in the asset.	IRR	IRR is the rate of return a corporation may anticipate receiving by investing in an asset using discounted cash flows.
h.	Does not consider the asset’s profitability.	Payback	The asset's profitability is not taken into account throughout the payback period. The payback period is a method that is not considered while calculating the asset's profitability.
i.	Uses accrual accounting rather than net cash inflows in its computation.	ARR	ARR is calculated using accrual accounting rather than net cash inflows. Rather than using the net inflow of cash and its predictions, the accounting rate of return primarily employed accrual accounting. It is required for users of financial statements.