Corporate finance

Question 1

Five basic principles of capital budgeting:

Answer 1

1. Cash flow basis instead of accounting profit
2. Timing of cash flows is crucial
3. Cash flows are based on opportunity costs
4. After-tax basis
5. Financing costs ignored, as required rate of return (discount rate) is sufficient

Question 2

The four broad capital budgeting project categories:

Answer 2

• Replacement projects
• Expansion projects
• New products and services
• Regulatory, safety, and environmental projects