14.1 a. What is capital budgeting? Why are capital budgeting decisions so import

Question

14.1

a. What is capital budgeting? Why are capital budgeting decisions so important to businesses?

b. What is the purpose of placing capital projects into categories such as mandatory replacement or expansion of existing products, services, or markets?

c. Should financial analysis play the dominant role in capital budgeting decisions? Explain your answer.

d. What are the four steps of capital budgeting analysis?

14.2 Briefly define the following cash flow estimation concepts.

a. Incremental cash flow

b. Cash flow versus accounting income

c. Sunk cost

d. Opportunity cost

e. Changes in current accounts

f. Strategic value

g. Inflation effects

14.3 Describe the following project breakeven and profitability measures. Be sure to include each measure’s economic interpretation.

a. Payback

b. Net present value (NPV)

c. Internal rate of return (IRR)

d. Modified internal rate of return (MIRR)

14.4 Critique this statement: “NPV is a better measure of project profitability than IRR because NPV leads to better capital investment decisions.”

14.5

a. Describe the net present social value (NPSV) model.

b. What is a project scoring matrix?

14.6 What is a post-audit? Why is the post-audit critical to good investment decision making?

14.7 From a purely financial perspective, are there situations in which a business would be better off choosing a project with a shorter payback over one that has a larger NPV?

Answer all questions above please!!!!!!!!

Explanation / Answer

14.1 a. Capital budgeting is a step by step process by which the business uses to determine the benefits of an investment project. The decision of whether to accept or deny an investment project as part of a company's growth initiatives, involves determining the investment’s rate of return that the project will generate.

Capital budgeting is important because it creates accountability and measurability. Any business that seeks to invest its resources in a project, without understanding the risks and returns would be held responsible if the project fails to provide desired returns to the investors. Moreover if a business does not have any procedure to determine the effectiveness of its investment decisions, the chances are that the business will hard time surviving in this competitive market.

Capital budgeting is important to a business because it creates a step by step process that enables a company to,

Develop and formulate long-term strategic goals,Seek out new investment projects,Estimate future cash flows and Control of Expenses.

b. The purpose of placing capital investments into categories is to prioritize various projects.The categories are all analyzed; and they are ranked priority wise. Especially in haealthcare industry.

c. Yes. Financial analysis plays an important role in capital investment analysis. it helps company to make better decisions, as it provides them with detail information regarding capital investment and its financial impact.

d. Estimate the expected cash flows

   Estimate the risk of generating these cash flows

     Estimate the appropriate opportunity cost of capital

     Determine the project's profitability and breakeven points/characteristics.

14.2 a.

An incremental cash flow is the additional cash flow of operation that an organization receives from taking on a new project. A positive incremental cash flow means that the company's cash flow will increase with the acceptance of the project.

Incremental cash flow is the net cash flow from all cash inflows and outflows over a specific time period and between two or more project choices.

b.

The cash flow statement, or statement of cash flows, measures the sources of a company's cash and its uses of cash over a specific time period.

The income statement (financial performance statement) measures a company's financial performance, such as revenues, expenses, profits or losses over a specific time period.

c.

A sunk cost is a cost that has already been incurred and thus cannot be recovered. A sunk cost differs from future costs that a business may face, such as decisions about inventory purchase costs or product pricing. Sunk costs are not included in the future business decisions, because the cost will be the same regardless of the outcome of a decision.

d.

Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. An opportunity cost represents an alternative given up when a decision is made. This cost is, therefore, most relevant for two mutually exclusive events. In case of investing when we chose one of the two portfolios, the opportunity cost is the return that could have earned from the one which was rejected.

e.

Current account is the difference between a country’s savings and its investment. The current account is an important indicator about an economy's health.It is calculated as sum of balance of trade, foreign net income and net current transfers.

f.

Strategic value is where a buyer can make more from a business than it would have received otherwise. Strategic value is created when a buyer gets greater value from the acquisition of an investment or property than can be provided by the inherent profit generating resources of the business being acquired.

g.

There are many effects of inflation,

1. Eroding purchase power

2. Cost of borrowing/financing increases.

3. Effects redistribution of income/wealth.

4. Effects production.

5. Increases unemployment.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.