7. The basic process and rules for capital budgeting Aa Aa The capital budgeting

Question

7. The basic process and rules for capital budgeting Aa Aa The capital budgeting process consists of the following activities: I. Estimating the relevant cash flows II. Reviewing a project's post-implementation and post-termination performance III. Evaluating alternatives and selecting the projects to be implemented IV. Generating capital investment project proposals What is the correct sequence for these activities? 0 IV, 1, 111, 11 111, 11, IV, I O IV, 11, 111, 1 O II, III, I, IV There are several practical aspects of capital budgeting that complicate what appears to be a straightforward procedure. Which of the following can add significant complexity to the practice of capital budgeting? At any point in time, the firm will not know all of the capital projects that should be considered and can probably only make uncertain estimates of the firm's marginal cost of capital and each project's future costs and revenues. O At any point in time, the firm will know with certainty all of the capital projects that should be considered but can probably only make uncertain estimates of the firm's marginal cost of capital and each project's future costs and revenues. O At any point in time, the firm will not know all of the capital projects that should be considered but will know with certainty the shape of its future marginal cost of capital schedule. O At any point in time, the firm will not know all of the capital projects that should be considered but will know with certainty the riskiness of each project's future costs and revenues.

Explanation / Answer

1) Correct sequence

2) At any point of time , the firm will know with certainty all of capital projects that should be considered but can probably only make uncertain estimates of the firm's marginal cost of capital and each project's future cost and revenue

Estimating cash flow is dufficult because estimating future itself is difficult. Estamating future involves varios variable which may be out of hand of company

3) True.

changes in working capital increase oe decrease in cash. Increase in working capital means cash is bloced can connot be used untill it is realiesd . Thus it should be considered while cash flow analysis

4) True

When resources used are taken from other facility or use the benefit which are foregone are takes as it's price

Generating capital iinvestment project proposal Estimating relevant cash flow Evaluating alternatives and selecting projects to be implemented Reviewing a project's post implementation and post termination performance

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