Capital Budgeting

1).Why is capital budgeting such an important process?

The reason why capital budgeting is important is that it helps create accountability and measurability. The capital budgeting is a measurable way for businesses to determine the economic and financial profitability of any investment project for a long period of time.

2.)Why are capital budgeting errors so costly?

Differentiate between NPV, PI, and IRR methods. Capital Budgeting errors are costly because when a cost analysis is made accurately on a project it can help make the business a more profitable because if its realistic numbers vs if not done right the company can loose all its investment. Net Present Value (NVP) of an investment annual free cash flows less the investment initial outlay (Keown 310)

Profitability Index (PI) or benefit cost ratio of the present value of an investment free cash flows to the investment initial outlay and Internal Rate Return (IPR) the rate of return that a project earns this IPR is defined as the discounted rate that present value of the projects free cash flows with the project initial cash outlay (Keown 316).

3.)What are the advantages and disadvantages of using each of these methods?

The advantage of using this method is making the timely decision as to when and how to better invest the free cash flow.

4.)Why is there a focus on cash flows rather than accounting profits in making capital budgeting decisions?

The main focus of cash flow rather than accounting is all based on the profit that is received from investments.

 5.)Why such an interest in incremental cash flows rather than total cash flows?

The incremental cash flows rather than cash flows are the benefits from an investment project and can help increase the possibility of future investments from the same investors.