14.1

a. What is capital budgeting? Why are capital budgeting decisions so important to businesses?

b. What is the purpose of placing capital projects into categories such as mandatory replacement or expansion of existing products, services, or markets?

c. Should financial analysis play the dominant role in capital budgeting decisions? Explain your answer.

d. What are the four steps of capital budgeting analysis?

14.2 Briefly define the following cash flow estimation concepts.

a. Incremental cash flow

b. Cash flow versus accounting income

c. Sunk cost

d. Opportunity cost

e. Changes in current accounts

f. Strategic value

g. Inflation effects

14.3 Describe the following project breakeven and profitability measures. Be sure to include each measure’s economic interpretation.

a. Payback

b. Net present value (NPV)

c. Internal rate of return (IRR)

d. Modified internal rate of return (MIRR)

14.4 Critique this statement: “NPV is a better measure of project profitability than IRR because NPV leads to better capital investment decisions.”

14.5

a. Describe the net present social value (NPSV) model.

b. What is a project scoring matrix?

14.6 What is a post-audit? Why is the post-audit critical to good investment decision making?

14.7 From a purely financial perspective, are there situations in which a business would be better off choosing a project with a shorter payback over one that has a larger NPV?