Capital Budgeting UPDATED ACTUAL Questions and CORRECT Answers
what is the capital budgeting process? the process of identifying and evaluating capital projects, that is, projects where
the cash flow to the firm will be received over a period longer than a year
what are the four main administrative steps to the capital 1. idea generation
budgeting process? 2. analyzing project proposals
3. create the firm-wide capital budget
4. monitoring decisions and conducting a post-audit
describe the "idea generation" step of the capital must generate good ideas, ideas can come from a number of sources including
budgeting process? senior management, functional divisions, employees, or sources outside the
company
describe the "analyzing project proposals" step of the a financial manager must create a cashflow forecast for each product to
capital budgeting process? determine its expected profitability
describe the "create the firm-wide capital budget" step of firms must prioritize profitable projects according to the timing of the project's
the capital budgeting process? cash flows, available company resources, and the company's overall strategic plan
describe the "monitoring decisions and conducting a follow up on all capital budgeting decisions, compare actual results to expected
post-audit" step of the capital budgeting process? results (because capital budgeting process is only as good as the estimates of the
inputs into the model used to forecast cash flows)
describe "replacement projects to maintain the business" made without detailed analysis, basically we ask the question, should existing
when talking about different types of capital budgeting operations continue
projects.
describe "replacement projects for cost reduction" when determine whether equipment that is obsolete, but still useable, should be
talking about different types of capital budgeting replaced
projects.
describe "expansion projects" when talking about taken on to grow the business and involve a complex decision-making process
different types of capital budgeting projects. because they require an explicit forecast of future demand
describe "new product or market development" when complex decision-making process that will require lots of detailed analysis
talking about different types of capital budgeting because of all of the uncertainty
projects.
describe "mandatory projects" when talking about required by the government or an insurance company, typically involve safety-
different types of capital budgeting projects. related or environmental concerns (generate little to no revenue)
what are the five key principles of the capital budgeting 1. decisions are based on cash flows, not accounting income
process? 2. cash flows are based on opportunity costs
3. the timing of cash flows is important
4. cash flows are analyzed on an after-tax basis
5. financing costs are reflected in the project's required rate of return
what is the capital budgeting process? the process of identifying and evaluating capital projects, that is, projects where
the cash flow to the firm will be received over a period longer than a year
what are the four main administrative steps to the capital 1. idea generation
budgeting process? 2. analyzing project proposals
3. create the firm-wide capital budget
4. monitoring decisions and conducting a post-audit
describe the "idea generation" step of the capital must generate good ideas, ideas can come from a number of sources including
budgeting process? senior management, functional divisions, employees, or sources outside the
company
describe the "analyzing project proposals" step of the a financial manager must create a cashflow forecast for each product to
capital budgeting process? determine its expected profitability
describe the "create the firm-wide capital budget" step of firms must prioritize profitable projects according to the timing of the project's
the capital budgeting process? cash flows, available company resources, and the company's overall strategic plan
describe the "monitoring decisions and conducting a follow up on all capital budgeting decisions, compare actual results to expected
post-audit" step of the capital budgeting process? results (because capital budgeting process is only as good as the estimates of the
inputs into the model used to forecast cash flows)
describe "replacement projects to maintain the business" made without detailed analysis, basically we ask the question, should existing
when talking about different types of capital budgeting operations continue
projects.
describe "replacement projects for cost reduction" when determine whether equipment that is obsolete, but still useable, should be
talking about different types of capital budgeting replaced
projects.
describe "expansion projects" when talking about taken on to grow the business and involve a complex decision-making process
different types of capital budgeting projects. because they require an explicit forecast of future demand
describe "new product or market development" when complex decision-making process that will require lots of detailed analysis
talking about different types of capital budgeting because of all of the uncertainty
projects.
describe "mandatory projects" when talking about required by the government or an insurance company, typically involve safety-
different types of capital budgeting projects. related or environmental concerns (generate little to no revenue)
what are the five key principles of the capital budgeting 1. decisions are based on cash flows, not accounting income
process? 2. cash flows are based on opportunity costs
3. the timing of cash flows is important
4. cash flows are analyzed on an after-tax basis
5. financing costs are reflected in the project's required rate of return
