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Chapter 4: Q1DQ (page 405)

What are the important administrative considerations in the capital budgeting process?

Short Answer

Expert verified

Important consideration includes the find investment opportunity and data of that investment. It also includes evaluation and revaluation of the investment.

Step by step solution

01

Definition of Internal Rate of Return

Internal rate of return is the rate which help the company to determine the profitability of the initial investment made by the business entity. It is calculated using the same formula as NPV is calculated.

02

Important consideration of capital budgeting process

Capital budgeting process performed by the investors or company have following considerations:

(a) Firstly, company find out the suitable or required investment opportunities in the market.

(b) Company has to collect the data of the all-investment opportunities available in the market.

(c) Then company evaluate the all the investment opportunities by using the capital budgeting techniques. After the evaluation company select the most suitable investment opportunity.

(d) After the selection, company revaluate the investment and analyse that whether investment are useful as per their expectation or not.

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Most popular questions from this chapter

Question: Beverly Hills started a paper route on January 1. Every three months, she deposits $550 in her bank account, which earns 8 percent annually but is compounded quarterly. Four years later, she used the entire balance in her bank account to invest in an investment at 7 percent annually. How much will she have after three more years?

Murray Motor Company wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of \(2.50 per share, and the current price of its common stock is \)50 per share. The expected growth rate is 8 percent.

a. Compute the cost of retained earnings (Ke). Use Formula 11-5.

b. If a $3 flotation cost is involved, compute the cost of new common stock (Kn). Use Formula 11-6.

Explain the relationship between inventory turnover and purchasing needs.

The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is \(60,000. The annual cash flows have the following projections:

Year

Cashflow

1

\)23,000

2

26,000

3

29,000

4

15,000

5

8,000

a. If the cost of capital is 13 percent, what is the net present value of selecting a new machine?

b. What is the internal rate of return?

c. Should the project be accepted? Why?

Question: You need $28,974 at the end of 10 years, and your only investment outlet is an 8 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year.

a. What single payment could be made at the beginning of the first year to achieve this objective?

b. What amount could you pay at the end of each year annually for 10 years to achieve this same objective?
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