Ans1)-In capital budgeting, the payback period is the selection criteria, or deciding factor, that most

businesses rely on to choose among potential capital projects. Small businesses and large alike tend to
focus on projects with a likelihood of faster, more profitable payback. Analysts consider project cash
flows, initial investment, and other factors to calculate a capital project's payback period.

These capital projects start with a capital budget, which defines the project's initial investment and its
anticipated annual cash flows. The budget includes a calculation to show the estimated payback period,
with the assumption that the project produces the expected cash flows each year.

The definition of the payback period for capital budgeting purposes is straightforward. The payback
period represents the number of years it takes to pay back the initial investment of a capital project
from the cash flows that the project produces.

The capital project could involve buying a new plant or building or buying a new or replacement piece of
equipment. Most firms set a cut-off payback period, for example, three years depending on their
business. In other words, in this example, if the payback comes in under three years, the firm would
purchase the asset or invest in the project. If the payback took four years, it would not, because it
exceeds the firm's target of a three-year payback period.

Ans2)-Cost of capital is the required return necessary to make a capital budgeting project, such as
building a new factory, worthwhile. When analysts and investors discuss the cost of capital, they
typically mean the weighted average of a firm's cost of debt and cost of equity blended together.

The cost of capital metric is used by companies internally to judge whether a capital project is worth the
expenditure of resources, and by investors who use it to determine whether an investment is worth the
risk compared to the return. The cost of capital depends on the mode of financing used. It refers to the
cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed
solely through debt.

Many companies use a combination of debt and equity to finance their businesses and, for such
companies, the overall cost of capital is derived from the weighted average cost of all capital sources,
widely known as the weighted average cost of capital (WACC).

Ans3)-The internal rate of return (IRR) is a discounting cash flow technique which gives a rate of return
earned by a project. The internal rate of return is the discounting rate where the total of initial cash
outlay and discounted cash inflows are equal to zero. In other words, it is the discounting rate at which
the net present value(NPV) is equal to zero.

For the computation of the internal rate of return, we use the same formula as NPV. To derive the IRR,
an analyst has to rely on trial and error method and cannot use analytical methods. With automation,
various software (like Microsoft Excel) is also available to calculate IRR. In Excel, there is a financial
function that uses cash flows at regular intervals for calculation.

IRR=(cash flows)/(1+r)^i-initial investment

Where:

cash flows=cash flow in the time period

r= discount rate

I=time period

The rate at which the cost of investment and the present value of future cash flows match will be
considered as the ideal rate of return. A project that can achieve this is a profitable project. In other
words, at this rate the cash outflows and the present value of inflows are equal, making the project
attractive.

Ans4)-A company’s working capital essentially consists of current assets and current liabilities. Current
assets refer to those assets that can be converted into cash within one year, like debtors, and stock and
prepaid expenses- expenses that have already been paid for. Current liabilities are the day-to-day debts
incurred by a business in its operation. These could be credit purchases made from vendors (creditors)
and outstanding expenses (expenses that are yet to be paid).

Thus, working capital management refers to monitoring these two components or the short-term
liquidity of your firm.

Three fundamental parameters that help you manage working capital requirements better and indicate
your liquidity standing of your firm are:

1. Working Capital Ratio:

A ratio between the current assets and current liabilities, it signifies the current ability of an organization
to pay off its short-time financial obligations.

2. Collection Period Ratio:

Also known as the debtors or accounts receivables turnover ratio, this ratio is indicative of a company’s
ability to convert its debts into cash. The lesser number of days it takes to realise its payments from its
debtors, the better.

3. Inventory Turnover Ratio:

Also known as the stock turnover ratio, this ratio monitors the time a company takes to converts its
goods into cash. Lower the time taken, higher is the company’s stock efficiency.