Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 18, Problem 4CQ
Summary Introduction
To determine: The Suitable Method that is to be used.
Introduction: A capital budgeting is the procedure by which an organization decides if the undertakings, are valuable seeking after. A venture that is valuable seeking after if it expands the worth of the organization. For example: Opening another branch putting resources into R&D, supplanting a machine.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Which of the following statements is FALSE?
A. When evaluating a capital budgeting decision, we generally include interest expense.
B. Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of
the decision to take on the project.
C. Many projects use a resource that the company already owns.
O D. As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.
In the textbook's capital budgeting examples, the book assumes that the firm recovers all of its working capital invested into a project. In the real world, is this a reasonable assumption? Justify your position and discuss when it would
If you as a business owner know that your bank will provide financing for a project and
that the cash generated from the project must cover the loan payments, would you then
have to include financing in your capital budgeting decision? Why or why not?
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
- Explain what a discounted cash flow method of making capital budgeting decisions is. Why are discounted cash flow methods superior to other methods? What are the risks related to using discounted cash flow methods? What a project profitability index? What does it measure? Why is it used? What is the primary criticism of the payback and simple rate of return methods of making capital budget decisions? What are the benefits in using these methods? Should companies continue to use these methods? Why or why not? What role, if any, should qualitative factors play in capital budgeting decisions? Explain your reasoning for your answer Discuss some of the major benefits to be gained from budgeting.arrow_forwardCompanies 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 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 NPV is more realistic than the assumption in the IRR. Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/reject decision for mutually exclusive projects. True or False: Sophisticated firms use only the NPV method in capital budgeting decisions.arrow_forwardWhen we use the term “capital budget,” we are referring to the list of projects that business might undertake during the next planning period. When analyzing whether a company should undertake a certain project, one of the most critical steps in analyzing a capital investment proposal is estimating the incremental cash flows for the project. This is important because there is financial risk involved when undertaking any new business venture. A variety of factors must be considered such as opportunity costs and sunk costs. Inflation must also be considered. The process of analyzing capital budget decisions requires a manager to consider many factors, as well as possibly even conducting a sensitivity analysis or a scenario analysis. By inputting different variables, the manager will be able to see the different outcomes which might occur. In the health care industry, these factors may include risk, profitability, the needs of both the medical staff and the patient population and how the…arrow_forward
- Suppose a company uses the NPV method, alongwith risk-adjusted WACCs, to calculate projectNPVs. However, it has not been considering realoptions in its capital budgeting decisions. Nowsuppose the company changes its capital budgeting process to take account of four types of realoptions investment timing, flexibility, growth,and abandonment. Would this decision be likelyto affect some of the calculated NPVs? Explainyour answerarrow_forwardDiscuss the payback period, NPV (net present value), and IRR (internal rate of return) methods for capital budgeting analysis. What result does each method provide the user? What are the limitations of each of these methods? Which method would you find most useful in making the best investment decisions for your business and why?arrow_forwardWhich of the following best describes the process of capital budgeting? a Forecasting revenues and expenses hmiting funds for capital improvements without considering the profitability of proposed prot determining a companys short term goals d. determinung the amount to spend on fixed assets and which fixed assets to purchasearrow_forward
- A finance director has been asked to explain various methods of project appraisal to his board colleagues. The operations director has already explained to the maring director that: The payback method is a good evaluation tool as it takes into account the liquidity of an individual project The Internal Rate of Return (IRR) calculation is irrelevant as the company does not need to borrow funds for its future projects (1) (2) (3) (4) The Net Present Value (NPV) method is too complicated as various discount rates have to be tried until a zero NPV can be found The Accounting Rate of Return (ARR) would be a good method after the audited accounts are completed and the company's profit margin can be ascertained The finance director has decided he should first inform the managing director that his board colleague has not accurately explained the alternatives, as DA. only statement (1) is true B. only statement (2) is true only statement (3) is true one of the statements are truearrow_forwardYou 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 An example of externality that can have a negative effect on a firm The cash flow at the end of the life of the project Creates value for a company because it gives the company the right but not the obligation to take future action to increase its cash flows The risk of a project without factoring in the impact of diversification A risk analysis technique that measures changes in the internal rate of return (IRR) and net present value (NPV) as individual variables are changed Marston Manufacturing Co. owns a warehouse that it is not currently using. It could sell…arrow_forwardYou are analyzing a project and have prepared the following data: a. Based on the net present value of this project, should you reject or accept this project? (Please provide the formulas for calculation or the keys applied if a financial calculator is used) b. What is the internal rate of return (IRR) of this project? Should you reject or accept this project? (Please use a financial calculator and list the keys you use)arrow_forward
- Incremental cash flows: a. refer to only cash flows which occur at the end of a project b. are cash flows which change if you proceed with the project c. refer to only cash flows which occur at the start of a project d. are never included in capital budgeting analysis e. refer to the existing cash flows of the businessarrow_forwardWhich one of these statements is correct? Accountants record sales and expenses after the related cash flows occur. The value of an investment depends on the size, timing, and risk of the investment's cash flows. Individuals tend to prefer later cash flows over current cash flows. When selecting one of two projects, managers should select the project with the higher total expected cash flow Most investors prefer greater risk over less risk.arrow_forwardWhich of the statements below is TRUE regarding capital budgeting? O A. Capital budgeting deals with how much to apportion spending on current assets. O B. Projects with NPVS greater than the IRR should be accepted. OC. We can find a project's NPV by simply taking the product of all of the project's undiscounted cash flows. O D. Ceteris paribus, a lower cost of capital would increase a project's NPV.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning