Topic 4: Capital Budgeting

Question 1

Capital budgeting

Answer 1

Process of decision making for investments in fixed assets.

Easier to evaluate than find them.

Question 2

Capital budgeting tools.

Answer 2

1. Payback period.
2. Net present value.
3. Profitability Index.

Question 3

Payback period

Answer 3

No. of years to recover initial capital outlay in an investment.

Shorter the better.

Feasible and desirable if payback period is = firms’ maximum payback period.

Question 4

P&C of Payback period

Answer 4

PROS:

1. Uses CF rather than profits.
2. Easy to compute and understand.

CONS:

1. Ignores TVM.
2. Does not consider CF after PBP.