Question

Q1: Why is capital budgeting very important for a firm?

Q3: Why do we analyze independent projects and mutually exclusive projects differently?

Answer 1

1. Capital budgeting is important for a firm as it helps in acceptance of such projects which yield a positive rate of return beyond the cost of capital of Company.

Capital budgeting decision involves Investment of huge amount of money for longer time frame so it needs a very high level of analysis and only such projects should be accepted which maximixes the overall value of firm.

Capital budgeting decision is made using processes like Net present value, Discounted payback method, and internal rate of return.

3.The independent and mutually exclusive projects are different because the independent project cash flows are never dependent upon each other.

While, Cash flows of different mutually exclusive projects are dependent on each other.

Independent projects are projects which are unrelated with each other while mutually exclusive projects compete with each other.

So we need to analyse them differently due to different features.