Begin a discussion of any of the questions below. The decision to start your own
ID: 2489039 • Letter: B
Question
Begin a discussion of any of the questions below.
The decision to start your own firm and go into business can be thought of as a capital budgeting decision. You only go ahead if projected returns look attractive on a personal and financial basis. Discuss this statement.
What major steps are involved in the capital budgeting process?
How is a crossover discount rate calculated, and how does it affect capital budgeting decisions?
Risky projects are accepted for investment on the basis of favorable expectations concerning profitability. In the post-audit process, they must not be unfairly criticized for failing to meet those expectations. Discuss this statement.
Explanation / Answer
Answer: If I started my own firm and go into business, I will use capital budgeting decision technique. Because
1)It involves the investment of substantial amount of funds.
2)The capital budgeting decision has its affect over a long period of time.
3)Generally capital budgeting decisions are irreversible.
4)It is a complex decision. It involves an assessment of future events.
Therefore, If a project return look attractive, on a personal and financial basis, we go ahead.
In capital budgeting process following major steps are involved
Crossover Rate: This is the rate of cost of capital at which the net present value of two projects are equal. It is useful because it tell us the when the currently-feasible project will no longer be feasible.
A project undertaken on the basis of favorable expectation of profit but it is not necessary that every project will be success. Projects also sometimes fail to meet expectations for reasons that no one could realistically anticipate. If the post-audit process is not used carefully, managers may be reluctant to suggest potentially profitable but risky projects. Because of these difficulties, some firms tend to play down the importance of the post-audit
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