13.1: Capital Expenditures Flashcards
What are capital expenditures?
Capital expenditures are a firm’s investments in long-lived assets, which may be tangible (such as property, plant, and equipment) or intangible (such as research and development, copyrights, brand names, and franchise agreements).
What is capital budgeting?
Capital budgeting is the process by which a firm makes capital expenditure decisions, involving:
identifying investment alternatives,
evaluating these alternatives,
implementing the chosen investment decisions,
and monitoring and evaluating the implemented decisions.
Why are capital expenditure decisions important for a firm?
Capital expenditure decisions are important because they determine a company’s future direction and are usually large, irreversible investments.
These decisions affect the firm’s financial and economic grounds and can have significant impacts on its survival and success.
Provide an example illustrating the irreversibility of capital expenditure decisions.
The decision by a firm to bring out a new soft drink involves substantial development costs and marketing expenses.
If the product fails, it is almost impossible to recover these investment costs.
Describe the steps involved in the capital budgeting process.
The steps in the capital budgeting process include:
Identifying investment alternatives.
Evaluating these alternatives.
Implementing the chosen investment decisions.
Monitoring and evaluating the implemented decisions.
How do tangible and intangible assets differ in terms of capital expenditures?
Tangible assets are hard, physical assets like property, plant, and equipment, while intangible assets are more abstract, such as R&D, copyrights, and brand names.
It is easier for a firm to borrow against tangible assets than intangible ones.
What should be considered when evaluating investment alternatives in capital budgeting?
When evaluating investment alternatives, firms should consider various factors like:
productivity improvement,
competitiveness,
long-term survival,
market impact,
and the overall cost of capital.
What is one factor that contributes to improved productivity in investment decisions?
Increased investment in machinery and equipment contributes to improved productivity.
What is the impact of poor investment decisions in the short term?
Poor investment decisions can make a firm less attractive and increase its cost of capital by affecting the market price of the firm’s debt and equity securities.
What are Michael Porter’s five critical factors that determine the attractiveness of an industry?
Michael Porter’s five forces are:
Entry barriers
The threat of substitutes
The bargaining power of buyers
The bargaining power of suppliers
Rivalry among existing competitors
Why is foreign direct investment (FDI) considered beneficial for Canada?
FDI is considered beneficial because it leads to economic spillovers, such as creating jobs, driving innovation, and fostering growth in various sectors like finance and technology.
What are the two foundational areas of global competition in the intangibles economy?
The two foundational areas are talent and ideas, which are deeply intertwined and drive the commercialization and competitive advantage of firms.
How do talent and ideas impact economic spillovers?
Talent and ideas can create significant economic spillovers by
attracting investments,
creating jobs,
and fostering innovation in various sectors, leading to overall economic growth.
Why is it important for Canada to commercialize its ideas and talents?
It is important to commercialize ideas and talents to
generate economic growth,
reduce unemployment,
and create high-quality jobs,
ensuring Canada remains competitive in the global market.
What are the potential consequences of not commercializing ideas effectively?
Failure to commercialize ideas effectively can lead to
lost economic opportunities,
increased unemployment,
and a decline in competitiveness.
