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Chapter 26: Q1SE (page 1464)

Outlining the capital budgeting process Review the following activities of the capital budgeting process: a. Budget capital investments. b. Project investments鈥� cash flows. c. Perform post-audits. d. Make investments. e. Use feedback to reassess investments already made. f. Identify potential capital investments. g. Screen/analyze investments using one or more of the methods discussed. Place the activities in sequential order as they occur in the capital budgeting process.

Short Answer

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The correct sequence is f. Identify potential capital investment, b. project investment cashflows, g. Screen/analyzeinvestments using one or more of the methods discussed. Place the activities in sequential order as they occur in the capital budgeting process, d. Make investments, a. Budget capital investments, c. Perform post-audits, e. Use feedback to reassess investments already made.

Step by step solution

01

a. Budget capital investments

The investor should invest his budget capital for that particular potential profit-making project by determining which fixed asset purchase to maximize the profit.

02

b. project investment cashflows

A projected cash flow statement estimates when, how much, and how long cash deficits or surpluses will occur for that entity throughout a future period.

03

c. Perform post-audits

The post-audit review process ensures that management has addressed all recommendations in the Audit Report. The Post-Audit Review takes place soon after the agreed implementation deadline to which management has committed in the management response.

04

d. Make investments

After analyzing various investment opportunities, one investor has to choose the most potential profit-making investment option.

05

e. Use feedback to reassess investments already made

In order to improve performance, it is important to actively listen, take the time to analyse, and then come up with the best solution. It offers constructive feedback and enables people to identify what they can alter to sharpen their attention and achieve better achievements.

06

f. Identify potential capital investment

Considering developing or alternative markets might help people identify capital investment. Consult with more seasoned investors for assistance. Watch the news closely. The demand of that particular project for further continue that project or to improve.

07

g. Screen/analyze investments

Analyze various investment opportunities using one or more of the methods like Net Present Value (NPV), Internal Rate of Return (IRR), or Accounting Rate of Return(ARR) to identify efficient investment opportunities.

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Most popular questions from this chapter

Using accounting rate of return to make capital investment decisions

Carter Company is considering three investment opportunities with the following accounting rates of return:

Project X

Project Y

Project Z

ARR

13.25%

6.58%

10.47%

Use the decision rule for ARR to rank the projects from most desirable to least desirable. Carter Company鈥檚 required rate of return is 8%.

Question: Defining capital investment terms

Fill in each statement with the appropriate capital investment analysis method:

Payback, ARR, NPV, or IRR. Some statements may have more than one answer.

  1. _____ is (are) more appropriate for long-term investments.
  2. _____ highlights risky investments.
  3. _____ shows the effect of the investment on the company鈥檚 accrual-based income.
  4. _____ is the interest rate that makes the NPV of an investment equal to zero.
  5. _____ requires management to identify the discount rate when used.
  6. _____ provides management with information on how fast the cash invested will be recouped.
  7. _____ is the rate of return, using discounted cash flows, a company can expect to earn by investing in the asset.
  8. _____ does not consider the asset鈥檚 profitability.
  9. _____ uses accrual accounting rather than net cash inflows in its computation.

Match the following business activities to the steps in capital budgeting process.

Steps in the capital budgeting process:

a. Develop strategies

b. Plan

c. Direct

d. Control

Business activities:

1. A manager evaluates progress one year into the project.

2. Employees submit suggestions for new investments.

3. The company builds a new factory.

4. Top management attends a retreat to set long-term goals.

5. Proposed investments are analyzed.

6. Proposed investments are ranked.

7. New equipment is purchased.

Using the time value of money Helen wants to take the next four years off work to travel around the world. She estimates her annual cash needs at $31,000 (if she needs more, she will work odd jobs). Helen believes she can invest her savings at 10% until she depletes her funds. Requirements

  1. How much money does Helen need now to fund her travels?
  2. After speaking with a number of banks, Helen learns she will only be able to invest her funds at 6%. How much does she need now to fund her travels?

What are some criticisms of the payback method?
See all solutions

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