Capital Budgeting Decision Criteria Slide 2: Suppose our firm must decide whether to purchase a new plastic molding machine for Rs 2, How do we decide?
Sunday, January 11, Financial Management Chapter Investment Decision Criteria A The firm increases in value.
B The firm gains knowledge and experience that may be useful in future decisions. C Good capital budgeting decisions help a company define its core competencies.
D All of the above. B Capital budgeting decision criteria the firm's value. C are diminished because the time value of money makes future cash flows less important. D are easily reversed. A The time value of money B The risk-return tradeoff C Net income based on accrual accounting principles D Cash flows directly resulting from the decision 4 Which of the following would be considered a capital budgeting decision?
A Walmart purchases inventory for resale to customers. B Apple sells bonds and uses the proceeds to repurchase stock. C Goldman Sachs obtains short-term loans to finance day to day operations. D Pfizer develops a new therapy and brings it to market.
A Purchase of office supplies B Granting credit to a new customer C Replacement of manufacturing equipment with more modern and efficient equipment D Financing the firm with more long-term debt and less equity 6 Good capital investment opportunities are most likely to exist when A many firms compete to sell similar products.
B interest rates are high and rising. C goods and services can be produced cheaply using readily available tools and technologies. D a line of business is expensive to enter and uses proprietary technology. FALSE 8 Competitive market forces make it imperative for a firm to have a systematic strategy for generating capital-budgeting projects.
TRUE 9 The size of capital investments and the difficulty in reversing them once they are made make capital-budgeting decisions very important to the firm.
TRUE 10 Capital budgeting is the decision-making process with respect to investment in working capital. TRUE 12 The primary objective of all capital budgeting decisions is to increase the size of the firm.
Give a few examples from recent business developments. The main objective of financial management is to maximize the value of the firm. The main source of value is the company's cash flows discounted at rates that reflect their risk.
Both the firm's cash flows and their level of risk are determined by the projects the company chooses to undertake. Recent examples include Apples string of "I" products pod, phones, padand Amazon's Kindle which have added tremendous value to those companies.
Students may cite examples from the text such as Kimberly-Clark's Huggies or Walmart's use of central distribution centers. Examples of less than successful decisions, at least so far, might include the Segue or the Gap's ephemeral redesigned logo.
Students' answers will vary their experience and recent events. Revenue enhancements investments may include new product lines such as Amazon's Kindle or GM's Chevy Volt undertaken, obviously, to increase cash flows by increasing sales. Companies such as Walmart may expand internationally or enter new businesses such as groceries for the same reason.
Cost reduction investments such as improved distribution, energy saving equipment or loss prevention systems may not increase sales, but increase cash flows by reducing costs.
Mandated investments may include such issues as access for the handicapped, pollution abatement, or employee safety. They are unavoidable because required by federal, state, or local laws. In these cases, companies will seek the least expensive way to comply.In capital budgeting, the payback period is the selection criteria, or deciding factor, that most businesses rely on to choose among potential capital projects.
Small businesses and large alike tend to focus on projects with a likelihood of faster, more profitable payback. Analysts consider project cash flows, initial investment, and other factors to calculate a capital .
What is 'Capital Budgeting' Capital budgeting is the process in which a business determines and evaluates potential expenses or investments that are large in nature.
These expenditures and investments include projects such as building a new plant or investing in a long-term venture. USA Capital Budget. Annual cash flows can be used to analyze potential investments by companies, known as capital budgeting.
Projected cash flows are generated, and then analysis is performed to determine whether a project meets required criteria for approval, and to make a comparison decision between multiple possible projects. Evaluate both alternatives using appropriate capital budgeting decision criteria.
3. Prepare a letter explaining the analysis you performed, including; how you calculated the cash flows; what capital budgeting methods you used, why they are important, and what they tell you; and a recommendation to Greg of whether or not he should move forward.
Capital Budgeting and Financial Management. Businesses look for opportunities that increase their shareholders’ value. In capital budgeting, the managers try to figure out investment opportunities that are worth more to the business than they cost to acquire.
Capital budgeting decision is one of the major decisions to be taken by financial managers as it affects the value of the firm. The selection of an investment project depends on the.