Capital Budgeting

Question 1

Capital Budgeting

Answer 1

Process of evaluating and selecting long term investment consistent with the company’s goal of maximizing owner’s wealth.

Question 2

Capital Expenditure

Answer 2

• Outlay of funds

- expected benefit for a period of more than 1 yr

Question 3

Operating Expenditure

Answer 3

• Outlay of funds

- benefits 1yr or less

Question 4

Motives for capital expenditure

Answer 4

1. Expansion
2. Replacement
3. Renewal
4. Others
   - advertising
   - r&d
   - Govt mandated expenditure

Question 5

Steps in CAP BUDG

Answer 5

1. Proposal Generation
2. Review and Analysis
   - Quanti and quali
3. Decision Making
4. Implementation
5. Follow - up/Monitoring

decision making if yes go to implementation. if no go back to proposal generation

Question 6

Cap Budgeting

Answer 6

Process of Deciding whether or not to commit resources to project whose cost and benefits are spread over several time periods
INCLUDE:
1. prep of annual budget
2. assessment of funding capacities
3. allocation off resources to renewal and expansion projects which clearly conform with the comp priority

Question 7

Characteristics of CAP BUDG

Answer 7

Deserve penetrating analysis and attention of top management because of the ff:

1. substantial amount of funds are required in capital proj
2. because of the length of time spanned by a capital inv decisions
3. effects of managerial errors will be difficult to reverse
4. plans must be made well into an uncertain time
5. success or failure of the company may depend upon a single or relatively few inv decisions

Question 8

Categories of capital Investment

Answer 8

1. Independent capital inv projects or screening decisions

2. mutually exclusive capital investment projects or preference decisions

Question 9

Independent cap inv proj or screening decision

Answer 9

projects which are evaluated individually and reviewed against predetermined corporate standards of acceptability resulting in an accept or reject decisions.
EX:
- inv in long term assets PPE
- new product
- corpo acq
- undertaking large scale adv campaign

Question 10

Mutually exclusive capital investment projects or preference decision

Answer 10

these are projects which require the company to choose from among specific alternatives. the project to be acceptable must pass the criteria of acceptability set by the company and be better that the other investment alternatives.
EX:
1. Replacement against renovation of equipt of facilities
2. rent or lease against ownership of facilities
3.purch of equipt from outside supplier rather than assembly of machinery by own staff

Question 11

elements of capital budgeting

Answer 11

1. The net amount of the investment
2. the operating cash flows or return from the investment
3. the minimum acceptable rate of return on the investment

Question 12

Basic Principles of CAP BUDG

Answer 12

1. Decisions are based on cash Flows. not accounting Income
2. Cash flows are based on opportunity cost
   3.

Question 13

Cash flow pattern

Answer 13

1. coventional
   - cash outflow followed by a series of cash inflows
2. Non-conventional
   - cash outflow followed by a series of both cash inflow and outflow