Question

What are the three typical types of cash outflows that are addressed when making capital budgeting decisions ? Also, what are the three typical types of cash inflows ? What, in your opinion, is the main reason why you would consider a specific capital budgeting outcome unacceptable?

Answer 1

Followings are the three typical types of cash outflows;

1. Initial investment in the project

2. Initial working capital requirements for the project

3. Amount invested for taking growth benefits from project etc.

Followings are the three typical types of cash inflows;

1. Annual operating cash inflows from the project

2. Recovery of salvage value at the end of project

3. Released working capital at the end of project etc.

Followings are the common reasons when we would consider a specific capital budgeting outcome unacceptable;

1. If project have very high payback period or unacceptable payback period.

2. When project have negative net present value or have low net present value in compare to other alternatives.

3. When project have low IRR in compare to other alternatives.

4. When project having high degree of risks inspite of having good NPV and IRR.

5. When project have low profitability index etc.