Module 7 : Capital Budgeting

Question 1

How much Stages of Capital Budgeting?

Answer 1

5

Question 2

5 stages of capital Budgeting

Answer 2

1. Identify Projects
2. Obtain Information
3. Make Predictions
4. Make Decisions by Choosing Among Alternatives
5. Implement the Decision, Evaluate Performance, and Learn

Question 3

Identify Projects

Answer 3

identify potential capital investments that agree with the organization’s strategy

Question 4

Obtain Information

Answer 4

gather information from all parts of the value chain to evaluate alternative projects

Question 5

Make Predictions

Answer 5

Forecast all potential cash flows attributable to the alternative projects

Question 6

Make Decisions by Choosing Among Alternatives

Answer 6

Determine which investment yields the greatest benefit and the least cost to the organization

Question 7

Implement the Decision, Evaluate Performance, and Learn

Answer 7

Obtain funding and make the investment selected in stage 4
Track realized cashflows, compare against estimated
numbers, and revise plans if necessary

Question 8

Methods of Capital Budgeting

Answer 8

• Net Present Value Method (NPV)
  -Internal Rate of Return Method (IRR)
  -Payback Method
• Accrual Accounting Rate of Return Method (AARR)

Question 9

Net Present Value Method (NPV)

Answer 9

calculates the expected
profit or loss of a project by discounting all expected
future cash flows (DCF) to the present (𝑡_0)

Question 10

The discount rate used is… (in net present value method)

Answer 10

Required Rate of
Return (RRR)

Question 11

Required Rate of
Return (RRR)

Answer 11

corresponds to the
minimum return with which an investor wants to be compensated for assuming the risks of a project

Question 12

Only projects with a
positive NPV or NPV = 0 are…

Answer 12

acceptable

Question 13

The internal rate (IRR) of return method corresponds to..

Answer 13

the discount rate at which the present value of all cash flows from a specific project is zero. In other words, the IRR is the discount rate at which the NPV = 0.

Question 14

The internal rate of return is based on which formula ?

Answer 14

the same formula as the NP

Question 15

A project is only acceptable if IRR is ?

Answer 15

east equal to the RRR

Question 16

Payback Method

Answer 16

calculates the time needed for a project or investment to recover the (start-up) losses

Question 17

short payback period

Answer 17

Managers usually prefer

Question 18

The amortization method is aimed at

Answer 18

liquidity

Question 19

Accrual Accounting Rate of Return Method (AARR)

Answer 19

divides the average annual return of a project by the initial investment

Question 20

The AARR method is similar to which other method ?

Answer 20

IRR method, as both methods calculate a percentage value as return

Question 21

The discounted cash flow (DCF)

Answer 21

calculates all expected future cash flows (inflows and outflows) of a project discounted to the present date

Question 22

NPV : calculation formula

Answer 22

NPV = -I0 + CF/(1+r)^1 + CF2/(1 +r)^2 + CFn/(1 +r)^n

Question 23

Why Manager use the IRR method ?

Answer 23

for investement decision

Question 24

IRR method : calculation

Answer 24

use the NPV caculation but here find r

Question 25

Application IRR

Answer 25

1. use any interest rate and calculate the NPV
2. Goal : Interest rate for NPV = 0
3. If the NPV is < 0, use a lower interest
4. If the NPV > 0, use a higher interest

Question 26

Payback Method calculation

Answer 26

Payback period =
(Initial Investment / Cashflow p.a.) + period

Question 27

Accrual Accounting Rate of Return Method (AARR): calculation

Answer 27

Expected net income / initial investement

Question 28

Expected net income

Answer 28

Average in the future periods, usually after tax and depreciation

Question 29

Strategic Considerations in Capital Budgeting

Answer 29

• For project evaluation and strategic decisions about which customers to invest in, the presented 5-step framework can be used
• Often R&D projects are judged as important strategic investments; however, the distant payoffs from R&D investments are more uncertain than other investments
• For any strategic capital budgeting decision good judgement and intuition is useful to make a good decision