Financial Management Chapter 10

3623 Words Feb 27th, 2013 15 Pages

9-1 Once the relevant cash flows have been developed, they must be analyzed to determine whether the projects are acceptable or to rank the projects in terms of acceptability in meeting the firm 's goal.

9-2 The payback period is the exact amount of time required to recover the firm 's initial investment in a project. In the case of a mixed stream, the cash inflows are added until their sum equals the initial investment in the project. In the case of an annuity, the payback is calculated by dividing the initial investment by the annual cash inflow.

9-3 The weaknesses of using the payback period are 1) no explicit consideration of shareholders ' wealth; 2) failure to take fully into account
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In practice, the IRR is preferred due to the general disposition of business people toward rates of return rather than pure dollar returns.


8-1 Capital budgeting is the process used to evaluate and select long-term investments consistent with the goal of owner wealth maximization. Capital expenditures are outlays made by the firm that are expected to produce benefits over the long term (a period greater than one year). Not all capital expenditures are made for fixed assets. An expenditure made for an advertising campaign may have long-term benefits.

8-2 The primary motives for making capital expenditures include:

* Expansion - increasing the productive capacity of the firm, usually through the acquisition of fixed assets. * Replacement - replacing existing assets with new or more advanced assets which provide the same function. * Renewal - rebuilding or overhauling existing assets to improve efficiency.

Other motives include expenditures for non-tangible projects that improve a firm 's profitability, such as advertising, research and development, and product development. A firm may also be required by law to undertake pollution control and similar projects.

Expansion and replacement involve the purchase of new assets as compared with renewal, where old assets are upgraded.

8-3 1. Proposal generation

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