Question

Explain the distinctive features of capital budgeting decisions.

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Answer 1

The distinctive features to be taken into consideration:

1. Initial Investment: Initial investment needs to recorded as it is an important for calculating NPV which determines whether a project is acceptable or not.
2. . Revenues: The incremental revenue due to replacement should be calculated and analysed . As higher revenue higher is the net income.
3. Operating expenses: Analysis has to be done whether operating expenses increase or decrease. Decrease in operating expense increase NPV
4. Depreciation: The depreciation needs to be ascertained whether it follows straight line, method, reducing balance method or MACRS method as each calculation will give different NPV.
5. Tax : Tax saving and tax expenses need to calculated
6. Salvage Value: The salvage value of the machine should also be determined,. If its used life ends after the period then salvage value =0
   

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