Question

Explain in detail what defines capital budgeting. Then, explain how two of these considerations above affect capital budgeting.

Describe a potential capital expenditure project from the industry in which you now work or an industry in which you are interested. What is the project? Describe and provide an approximate value of the initial cash flow. Describe and provide an approximate value of the annual cash flow. Provide an estimation of the life of the project, as well as the exit costs.

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Answer 1

In Capital Budgeting we evaluate the feasibility of the project to be undertaken, it can be either financially, Technically, or by other methods.the decision taker has to identify and find out the various alternatives available to an investment and he chooses the best alternative available.

In short Capital Budgeting is the evaluation of the investment to be made.

After evaluating the investment a project report is to be made which should contain following matters :

1. Promoters- Their experience, past records of performance should be mentioned

2. Analysis of the current industry

3.Economic analysis of the decision

4.Cost of the whole project

5. Input availability

6. Technical analysis

7.Financial Analysis etc.

Now let's suppose we own a cold drink manufacturing factory and we want to buy a new boiler machine which cost us 10 million. say by buying new machine our capacity will increase by 10% of current capacity. so it will give us net cash inflow of 4 million per year. and the machine will last for 5 years and after 5 years it can be sold for 0.5 million.

exit cost means the cost we will incur while scrapping the machine, say in our case there will be no exit cost.

change in the Life of the project, Initial outflow of the project, cash inflow of the project each year, the scrap value of the project, exit cost of the project may also affect the investment decisions..