CCIFP – Capital Budgeting: Questions With Appropriate
Solutions
Capital Budgeting Correct Answer - The process of planning capital
investments and evaluating and selecting the best projects from a range of
alternatives
Examples of capital imvestments Correct Answer - - Plant and
equipment
- Other companies (acquisitions)
- Property
- Less tangible assets such as research and development and new product
development
5 steps to capital budgeting Correct Answer - 1) generation of proposed
projects for increasing shareholder wealth I.e. New products, techniques,
replacement of worn- out facilities or equipment and acquisition of other
companies
2) estimate cash inflows and out flows of each proposed project
3) risk evaluation - assess the uncertainty of both the required outlay of cash
and estimated cash inflow
4) select among the proposed projects those that are expected to increase the
company's net worth
5) monitor the approved projects for actual vs forecasted variance
Methods of evaluating cash flows Correct Answer - 1) incremental cash
flows after tax over the entire life of the project
2) recognized time value of money
3) required rate of return on the proposed project
Incremental cash flows Correct Answer - The differences between cash
flows of the company with a new project less cash flows of a company with a
project. The timing of cash flows makes no difference just as long as they are
new incremental cash flows
New investment cash flow Correct Answer - The first incremental cash
flow that occurred in a capital investment. When expanding operations
Solutions
Capital Budgeting Correct Answer - The process of planning capital
investments and evaluating and selecting the best projects from a range of
alternatives
Examples of capital imvestments Correct Answer - - Plant and
equipment
- Other companies (acquisitions)
- Property
- Less tangible assets such as research and development and new product
development
5 steps to capital budgeting Correct Answer - 1) generation of proposed
projects for increasing shareholder wealth I.e. New products, techniques,
replacement of worn- out facilities or equipment and acquisition of other
companies
2) estimate cash inflows and out flows of each proposed project
3) risk evaluation - assess the uncertainty of both the required outlay of cash
and estimated cash inflow
4) select among the proposed projects those that are expected to increase the
company's net worth
5) monitor the approved projects for actual vs forecasted variance
Methods of evaluating cash flows Correct Answer - 1) incremental cash
flows after tax over the entire life of the project
2) recognized time value of money
3) required rate of return on the proposed project
Incremental cash flows Correct Answer - The differences between cash
flows of the company with a new project less cash flows of a company with a
project. The timing of cash flows makes no difference just as long as they are
new incremental cash flows
New investment cash flow Correct Answer - The first incremental cash
flow that occurred in a capital investment. When expanding operations
