Chapter 11 Homework Questions 1. Why are capital projects critical? 2. What are the critical steps involved in the capital budgeting process? 3. Why is capital cost allowance used instead of depreciation expense in capital budgeting? 4. What do we mean by the economic life of a project? 5. Differentiate between a capital investment and an expense investment. 6. Why is working capital part of cash payouts in a capital investment, and what is its makeup?

Chapter 11 Homework Questions 1. Why are capital projects critical? 2. What are the critical steps involved in the capital budgeting process? 3. Why is capital cost allowance used instead of depreciation expense in capital budgeting? 4. What do we mean by the economic life of a project? 5. Differentiate between a capital investment and an expense investment. 6. Why is working capital part of cash payouts in a capital investment, and what is its makeup?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter16: Country Risk Analysis

Section: Chapter Questions

Problem 9QA

See similar textbooks

Related questions

Q: 7...NPV is the best tool to use for capital budgeting because: a.It uses the IRR to discount cash…

A: Net Present Value (NPV) is a capital budgeting technique which uses a discount rate to bring all the…

Q: Ch 11: Exploring Finance Visualizations The Cost of Capital with Increasing Cash Flow 1. What is the…

A: Net present value (NPV) is the value of all the cash flow of the investment (positive and negative)…

Q: QUESTION 5 The internal rate of return can never be equal to the external rate of return. O True O…

A: Since you have asked multiple questions, we will solve the first question 5) for you. If you want…

Q: 1. The payback criterion for capital investment decisions a. is conceptually superior to the IRR…

A: The payback criteria is that capital budgeting tool in which we consider the length of time that it…

Q: It is the difference between the present value of cash inflows and the present value of cash…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: Question 2: What factors should you keep in our mind as a financial manager when selecting methods…

A: The factors to be kept in mind when selecting the method of capital budgeting are -

Q: Quèstion 6 The initial step in the capital budgeting process is O estimating cash flows O selecting…

A: Capital budgeting : Capital Budgeting is the process of making long term Investment decision.

Q: 1. Set capital spending 2. Determine potential projects 3. Forecast cash flows 4. Identify cost of…

A: Capital budgeting : Capital budgeting is the process of selecting a feasible capital expenditure…

Q: Participation #6: Why is it desirable to construct capital budgeting rules so that higher-risk…

A: A risk is a probability of unfavorable outcome. All investments are subjected to risks. So, a high…

Q: QUESTION 19 The capital budgeting decision model that utilizes all the discounted cash flow of a…

A: Capital Budgeting is a technique that helps the company to identify and analyze the potential…

Q: Based on your understanding of the capital budgeting evaluation methods, which of the following…

A: Introduction: This question is related to concept of capital budgeting. It is an investment…

Q: Which of the following correctly completes this sentence? The goal of capital budgeting is to...…

A: Capital budgeting is a process in which the company decided on projects wich will add value to the…

Q: Before making capital budgeting decisions, finance professionals often generate, review, analyze,…

A: The correct statements are: Statement A: The NPV shows how much value the company is creating for…

Q: Why do we only include free cash flows when evaluating a project using the NPV project evaluation…

A: Net Present Value is one of the capital budgeting techniques. It is defined as the difference…

Q: 16) Which of the following is the significance of Capital Budgeting? a. Irreversible b. All the…

A: Capital budgeting decisions involve the estimation of the cash flows relating to different proposals…

Q: Calculating the payback period for a capital project requires knowing which of the following? a.…

A: Payback period = Initial investment/Annual cash inflows

Q: QUESTION 1 Suppose that you are working as a capital budgeting analyst in a finance department of a…

A: Please note that we have answered the Question 1 Part 1 here. Please resubmit the other questions…

Q: The net present value (NPV) capital budgeting decision method: can be directly compared between…

A: (1) The NPV capital budgeting decision method represents the calculation of the time value of money…

Q: Which of the following statements about the "payback method" of selecting capital projects is true?…

A: In the payback method, all cash flows are disregarded.

Q: Question 29 PART 1 The stand-alone principle allows us to analyze each project in isolation from…

A: 1. The stand-alone principle allows us to analyze each project in isolation from the firm simply by…

Q: QUESTION 20 The term "capital structure" refers to: O the manner in which a firm obtains its…

A: Capital structure means mix of debt and equity to finance its overall business activities. It helps…

Q: 1. long-term planning for making and financing proposed capital outlays is called: Working Capital…

A: Capital Budgeting - There are many projects which require huge investments and where the returns are…

Q: 8.6 letters a , b and c

A: a)The interest rate which origins the net present value of cash flows to be equal to 0.IRR is a…

Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Chapter 11 Homework Questions

Why are capital projects critical?

What are the critical steps involved in the capital budgeting process?

Why is capital cost allowance used instead of depreciation expense in capital

budgeting?

What do we mean by the economic life of a project?

Differentiate between a capital investment and an expense investment.

Why is working capital part of cash payouts in a capital investment, and what is

its makeup?

Definition Video Definition Accounting method wherein the cost of a tangible asset is spread over the asset's useful life. Depreciation usually denotes how much of the asset's value has been used up and is usually considered an operating expense. Depreciation occurs through normal wear and tear, obsolescence, accidents, etc. Video

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1 Capital projects:

VIEW

Step 2 Explanation:

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

8. Conclusions about capital budgeting The decision process Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm’s strategic goals. Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. A. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/reject decision for mutually exclusive projects. The discounted payback period improves on the regular payback period by accounting for the time value of money. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR.…
8. Conclusions about capital budgeting The decision process Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm’s strategic goals. Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. The NPV shows how much value the company is creating for its shareholders. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. True or False: Sophisticated firms use only the NPV method in capital budgeting…
1. Define capital expenditures and provide examples of capital expenditures.2. Cash flows for a particular project should be measured on an incremental basis. What does that mean?3. How does the opportunity cost concept affect capital budgeting cash flow determination?4. What factors should be considered when estimating a new business’ NINV? Is it any different for an asset replacement project. 5. Why is depreciation, a noncash expense, considered when estimating a project’s net cash flows?6. What are the potential tax consequences of selling an old asset in an asset replacement investment decision?
1. Taking into consideration all the information given, determinethe Net Present Value of the project and advice the company onwhether to invest in the new line of product. 2. Why should the cost of capital used in capital budgeting becalculated as a weighted average of the capital component ratherthan the cost of the specific financing used to fund a particularproject?
5. Taking into consideration all the information given, determine the Net Present Value of the project and advice the company on whether to invest in the new line of product. 6. Why should the cost of capital used in capital budgeting be calculated as a weighted average of the capital component rather than the cost of the specific financing used to fund a particular project?
1. Concepts used in cash flow estimation and risk analysis You can come across different situations in your life where the concepts from capital budgeting will help you in evaluating the situation and making calculated decisions. Consider the following situation: The following table contains five definitions or concepts. Identify the term that best corresponds to the concept or definition given. Concept or Definition Term The specific cash flows that should be considered in a capital budgeting decision A cost that has been incurred and may be related to a project but should not be part of the decision to accept or reject a project The cash flows that the asset or project is expected to generate over its life The effects on other parts of the firm The cost of not choosing another mutually exclusive project by accepting a particular project A successful sushi chain in Hong Kong spent $500,000 to conduct a study on whether to open…
29. Which one of the following statements is correct regarding capital Investment appraisal methods?a) The Payback period takes into account all the cash flows accruing to the projectb) The Net Present value method does not take the time value of money into accountc) The Accounting Rate of Return takes the time value of cash flows into consideration and is the one most often used in practice by business organisationsd) The Internal Rate of Return is the discount rate at which the net present value is zero
1. Set capital spending 2. Determine potential projects 3. Forecast cash flows 4. Identify cost of capital ang risk 5. Select and implement project. Discuss which the capital budgeting process listed above you think would be the most challenging. Give reasons for yout answers.
Defining capital investments and the capital budgeting process Match each definition with its capital budgeting method. Methods 1. Accounting rate of return 2. Internal rate of return 3. Net present value 4. Payback Definitions a. Is only concerned with the time it takes to get cash outflows returned. b. Considers operating income but not the time value of money in its analyses. c. Compares the present value of cash outflows to the present value of cash inflows to determine investment worthiness. d. The true rate of return an investment earns.
1. Of all the methods for evaluating the data (techniques of capital budgeting), which one do you think you would be most likely to use in the future and why? 2. How does depreciation factor into capital investment decisions?
1- What are the payback and discounted payback methods? What are their main weaknesses? 2- What are the five stages of capital budgeting? 3- What are strengths and weaknesses of the accrual accounting rate-of-return (AARR) method for evaluating long-term projects? 4- What are the relevant cash inflows and outflows for capital budgeting decisions? 5- What strategic considerations arise in the capital budgeting process?