Module 8 Flashcards
what is capital budgeting
it is the analysis and evaluation of investment projects that normally produces FEBs over a number of years to increase firm value
what is the process of capital budgeting
- strategic plan
- generating a proposal
- review and analysis
- decision making
- implementation
- control (cost and objective)
explain investment risks
over capacity = high overloads, inefficiencies and lower profits
explain non-investment risks
under capacity = lower profits, sweating assets - high operating costs, loss of investment flexibility
types of investment projects
- replacement and expansion (existing)
- independent projects
- mutually exclusive (alternatives)
- contingent (have to accept both)
- divisible and non-divisible
beginning-of-project cash flows
- initial outflow / project cost
- sale of existing assets
- initial WC requirements to start the project
annual operating cash flows
- incremental net future CF from the project
- net operating CF (profit + depr + int)
- include only fixed costs and operating costs
- ignore interest
end of project cash flows
- recoupment or scrapping allowance
what is recoupment
residual value > tax value
when is there a scrapping allowance
when residual value < tax value
what is a post audit
formal assessments and comparison of actual returns achieved for projects compared to projected returns
different methods to use for capital budgeting?
- non-discounted payback
- discounted payback
- accounting rate of return
- internal rate of return
