Capital Budgeting Flashcards
an asset that will be useful to a business over a long period of time such as land, buildings, equipment, etc., which is owned by a company and which is used to produce income for the company.
CAPITAL ASSETS
the process of identifying, evaluating, planning and financing capital investment projects of an organization. used by companies to evaluate major projects and investments, such as new plants or equipment.
CAPITAL BUDGETING
CAPITAL BUDGETING involves two decisions.
Financing and Investment Decisions
COMMON TYPES OF CAPITAL PROJECTS
Replacement, Improvement and Expansion.
CAPITAL INVESTMENT FACTORS
Net Investments, Cost of capital and Net returns or investment recovery.
cost or cash outflows less cash inflows, possible savings and tax effects incidental to the acquisition of the investment projects
Net investments
Initial cash outlay covering all expenditures on the project up to the time when it is ready for use or operations. purchase price of the asset, freight, insurance, taxes, handling fees, installations, test-runs
Net investments cost or cash outflows.
Working capital requirements to operate the project at the desired level.
*Market value of an existing , currently idle asset which will be utilized in the operations of the proposed capital investment project.
Net investments cost or cash outflows:
Trade-in value of old assets in case of replacement.
*Avoidable cost of immediate repairs on old assets to be replaced net of tax.
Net investments savings or cash inflow:
The cost of using funds; also called the hurdle rate, required rate of return, cut-off rate.
Cost of capital
Can be viewed as either:
*Annual net cash inflow
*Accounting net income
Net returns or investment recovery
PROJECT EVALUATION TECHN
Traditional and Discounted Models
