Introduction and Project Risk

Question 1

define capital budgeting?

Answer 1

The process of measuring, evaluating and selecting long-term investment opportunities for the firm

• Selecting new equipment
• Evaluating new products
• Making advertising campaign decisions

Question 2

Capital undertakings have both elements of risk and reward. What is risk? What is rewards?

Answer 2

The possibility of loss or other unfavorable results that derives from uncertainty implicit in future outcomes

Examples: incomplete or incorrect project analysis, changes in laws/regulations.

Reward= The benefit expected or required from investment of resources in capital projects and other undetakings

Relationship between risk and reward, the greater risk, the greater the reward.

Question 3

What is the source of capital and capital projects?

Answer 3

Source of capital= investors

Capital is passed through the firm to projects. Projects provides a return which is then passed back to the investor.