1) We know that capital budgeting is a forward looking process based on sales/revenue and expense projections which convert to operating cash flows which are then discounted to the present and compared to the project cost. Briefly EXPLAIN this process and make sure you cover issues with respect to estimation errors and how this may impact net present value (NPV) and IRR results.

Now, what does positive net present value mean? How is it that the firm will succeed in earning a return above the one you would expect given the risk of the project under consideration? Discuss the possible sources of positive net present value and why is it critical to understand its source?