General Studies · Financial Ratios and Capital Budgeting

Evaluate the following three statements: Statement 1: The Debt Service Coverage Ratio (DSCR) is a critical solvency ratio used by financial institutions during term loan appraisal to determine the borrower's ability to service the debt, calculated by dividing the sum of Net Profit after tax, Depreciation, and Interest on term loan by the total amount of annual principal and interest repayments. Statement 2: A DSCR of exactly 1.0 indicates that the project generates just enough cash flow to meet its debt obligations, but lenders typically insist on a minimum average DSCR of 1.5 to 2.0 to provide a safety margin. Statement 3: In capital investment decisions using the Payback Period method, the technique focuses primarily on the liquidity and risk of the project by calculating the time required to recover the initial investment, but it ignores the time value of money and all cash flows occurring after the recovery of the initial outlay. Identify the correct statement evaluation.