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Lesson Plan on Capital Budgeting Capital Budgeting - process of deciding whether or not to commit resources to projects whose costs and benefits are spread over several time periods. Characteristics of a Capital Investment Decision: 1. Substantial amount of funds are required in capital projects. 2. Because of the length of time span by a capital investment decision, the element of uncertainty becomes more critical. 3. The effect of managerial errors will be difficult to reverse. 4. Plans must be made well into an uncertain future. 5. Success or failure of the company may depend upon a single or relatively few investment decision. Two general types of capital investment projects: A. Independent capital…show more content…
The new equipment is estimated to be useful for ten years with an estimated salvage value of P20,000 Required: Compute the Net cash Inflow after taxes. III. Minimum or Lowest Acceptable Rate of Return or Cost of Capital The interest rate used for evaluating projects can be as follows: 1. Cost of Capital – a weighted average cost of long-term funds (WACC). Only projects that can earn at least what the firm pays for funds should be accepted. 2. Minimum Acceptable Rate of Return – a particular rate that is considered to be the lowest ROR that management will accept 3. Desired Rate of Return, Target Rate of Return, Required Rate of Return – a rate that reflects management’s ROR expectations 4. Hurdle Rate – a level that a project’s ROR must “jump over” or exceed 5. Cutoff Rate – the rate at which projects with a higher
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