RE: Capital Budgeting

Deangela Dixon

12/9/2012 4:30:30 AM

A screening decision is made to see if a proposed investment is worth the time and money. A preference capital budgeting decision is made after these screening decisions have already taken place. The alternatives being considered have already passed the test and have been shown to be advantageous. The company then chooses between several alternatives based on factors such as need, degree of profitability and the useful life of the proposed purchase.
http://smallbusiness.chron.com/difference-between-capital-budget-screening-decisionpreference-budget-36959.html

The difference between capital budgeting screening decisions and capital budgeting preference decisions is that screening decisions relate to whether a proposed project passes a preset hurdle. While preference decisions relate to selecting among several competing courses of action.
RE: CAPITAL BUDGETING MEANING Deangela Dixon 12/10/2012 9:00:32 AM

Modified:12/10/2012 9:03 AM Our lecture states capital budgeting is a process of evaluating proposed capital investments, such as investments in plant and equipment, or projects. The capital budgeting process involves (1) identifying potential investment projects, (2) choosing which project(s) to undertake, (3) financing the project(s), and (4) monitoring the project(s) following their undertaking.

http://finance.mapsofworld.com/corporate-finance/capital-budgeting/

Capital budgeting is a process of planning that is used to ascertain the long-term investments of the firm. The long-term investment of a firm may be for new machinery, new plants, replacement machinery, new products and the research and development projects. Judging the capital requirement of a business is the most important step while raising the fund or capital for a business. A part of the collected capital is generally used for capital investment by the business while a substantial part is kept as working capital. The major purpose of capital budgeting is to recognize and also prioritize the capital investments on the basis of maximum returns to the business. Capital budgeting can also be considered as a managerial tool required for managing the collected capital of the business. The core responsibility

of the financial managers is to choose the investments in a way so as to generate good rates of return. Hence, this is the job of the financial manager to decide whether a particular investment should be included in the portfolio or not.The concept of capital budgeting gives immense importance on the project selection of a business. This is because the business is experiencing capital expenditure on every project that is generating cash flow in the future. If the capital expenditure is large, proper capital budgeting should be used to ensure future earning of the business.

Some of the major techniques of capital budgeting are:

Net Present Value Internal Rate of Return Profitability Index Equivalent Annuity Modified Internal Rate of Return
RE: Capital Budgeting Deangela Dixon 12/11/2012 5:15:01 AM

According to our text, the net present value method, the present value of a project's cash inflows is compared to the present value of the project's cash outflows. It determines whether or not the project is an acceptable investment. The present value of a cash flow depends on when it occurs. This is simpler to use than the internal rate of return method. The net present value method assumes the rate of return is the discount rate. Advantages are: considers the risk of future cash flows and tells whether the investment will increase the value of the firm. Disadvantage are : requires an estimate of the cost of capital in order to calculate the net present value and it is expressed in terms of dollars and not percentages. The internal rate of return is the rate of return of an investment project over its useful life. This is computed by finding the the discount rate that equates the present value of a projects's cash outflows with the present value of its cash inflows. (The internal rate of return is the discount rate that results in a present value of zero). This may require hunting for the discount rate that results in a net present value of zero. The internal rate of return method

assumes the rate of return earned on cash flows is the internal rate of return on the project. The disadvantage of this method is it can't be used in situations where the cash flows of a project change more than once during the project's life. When the net present value method and the internal rate of return method do not agree concerning the attractiveness of a project it is best to go with the net present value method. Of the two methods, it makes the more realistic assumption about the rate of return that can be earned on cash flows from the project. Both methods have the same advantages.
RE: Practice Final Exam Deangela Dixon Modified:12/10/2012 6:48 AM 12/9/2012 11:58:00 PM

3 .An increase in the activity level within the relevant range results in a decrease in fixed cost per unit. The reason I chose this answer is variable costs would be a factor in the relevant range. Proportional to the level of activity as production increases, total variable costs increases; total variable costs would decline due to the decline in the level of activity.
http://socyberty.com/issues/fundamentals-of-cost-behavior/#ixzz2Eem45QTs

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Question 4

Deangela Dixon

12/10/2012 6:52:44 AM

4. Sales 350,000 CGS 160,000 = 190,000

RE: Practice Exam Questions Deangela Dixon 12/11/2012 5:21:19 AM

8. Wallace Inc. Answer C

BEP Sales = Fixed Exp/CM ratio = 1,400,000/.35 (2,100.000/6,000,000) = 4,000,000

Practice Final Exam Deangela Dixon 12/12/2012 10:27:33 AM

31. The performance of the manager of Division A is measured by residual income. Which of the following would increase the manager's performance measure?

B) Decrease in average operating assets. I chose this answer because the others cause a decrease in the residual income