Question

13. What is capital budgeting?

Why capital budgeting decisions are so important to business?

14. What are the five steps of capital budgeting?

15. Role of financial analysis

16. Cash flow estimation

17. What is breakeven analysis in capital budgeting?

18. Uneven cash flows stream and how to approach these problems

19. Describe payback period, NPV and IRR?

20. What is MIRR?

Answer 1

13. Capital budgeting : is the process of determining, future investments which are worthy enough to generate substantial returns. Company management uses the capital budgeting projects , which will generate highest returns. Since, capital budgeting help in making purchase decisions about expensive assets, capital budgeting helps in making purchase decisions.

Capital budgeting is important because it helps identify the capital budgeting decisions,as capital budgeting decisions are most expensive and require large sums of money , and poor decisions can lead to loss of large amount of money.

14. Steps of capital budgeting :

• Identify the potential opportunities :In the first step, we identify the possible alternatives for investments.
• Screening the proposals : Once, the Industry has been identified, we screen the proposals , to select the best among the alternatives.
• After , the screening process is over we select the best investment opportunity.
• Next, we carry out monitoring of  performance by identifying the potential risk and cash flow benefit.
• The last step is generate feedback.

15. Role of financial analysis:

Financial analysis is very important it helps in guiding the needs of the business and allocating resources of the business by evaluating the potential investments in stocks, bonds and other investments. It also helps in determining the future earnings ad expenses of the company. It also helps in determining the impact of government policies and the strategies of the competitors.

16. Cash flows consists of cash inflows and cash outflows. Cash flow analysis, involves estimating the cash flows to analyze an investment proposal.

Cash flow estimation constitutes the most important step in capital budgeting.