Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 26: Q2RQ (page 1463)

Describe the capital budgeting process.

Short Answer

Expert verified

Answer

The capital budgeting process is linked with the allocation of funds into the capital assets for the growth of the business.

Step by step solution

01

Meaning of Budgeting

Budgeting is the process of estimating the future expected revenues and expenses associated with a business entity. Budgets are prepared separately for all the segments of a business and are used to determine growth.

02

Capital budgeting process

The capital budgeting process refers to the way of organizing and allocating the funds into the capital assets that result in good returns.

In addition, the capital budgeting process passes through four major stages:

  1. Initially, this process requires thedevelopment of strategies.

  2. Appropriate planning must be done in order toallocate the funds.

  3. Implementation of thestrategies and planning.

  4. Controlling the variances in the outcomes.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What is the decision rule for payback?

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’s 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’s profitability.
  9. _____ uses accrual accounting rather than net cash inflows in its computation.

Lockwood Company is considering a capital investment in machinery:

Initial investment $ 600,000

Residual value 50,000

Expected annual net cash inflows 100,000

Expected useful life 8 years

Required rate of return 12%

8. Calculate the payback.

9. Calculate the ARR. Round the percentage to two decimal places.

10. Based on your answers to the above questions, should Lockwood invest in the machinery?

Question: Defining capital investments and the capital budgeting process

Match each capital budgeting method with its definition.

Methods

1. Accounting rate of return

2. Internal rate of return

3. Net present value

4. Payback

Definitions

  1. Is only concerned with the time it takes to get cash outflows returned.
  2. Considers operating income but not the time value of money in its analyses.
  3. Compares the present value of cash outflows to the present value of cash inflows to determine investment worthiness.
  4. The true rate of return an investment earns.

How is the present value of an annuity determined?
See all solutions

Recommended explanations on Business Studies Textbooks

Human Resources

Read Explanation

Influences On Business

Read Explanation

Nature of Business

Read Explanation

Corporate Finance

Read Explanation

Financial Performance

Read Explanation

Strategic Direction

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free