30. Capital Expenditures and Cash Budgets

Question 1

How does the organization’s strategic plan affect which capital projects are selected?

Answer 1

The strategic plan is used to identify long-term capital projects that either strengthen the organization’s current business position or help the organization move or expand into a new business position.

Question 2

How does spending on capital projects differ from spending on operation processes?

Answer 2

In contrast to smaller spending decisions on operations that involve less risk over shorter time periods, capital projects are extensive investments requiring significant financial, management, and labor capital over lengthy periods of time.

Question 3

What are three key analyses that take place with capital budgeting decisions?

Answer 3

1. Financial analysis: NPV, IRR, payback, and ROI
2. Risk analysis: assessing uncertainty with respect to outcomes and inputs
3. Qualitative analysis: considering non-quantitative characteristics

Question 4

What are the three sections of traditional cash budgets?

Answer 4

1. Cash receipts
2. Cash disbursements
3. Financing

Question 5

What are three approaches that managers can use to solve cash needs?

Answer 5

1. Increase the amount of cash generated by operations or reduce the amount of cash used in operations.
2. Take out short-term operating loans.
3. Make the credit policy for customers stricter and negotiate for a less strict payables policy.