A. ?F.la-B: ||THeading 2LNormal! 1Title Heading 1 Subtitle Paragraph Styles Capital Budgeting Capital budgeting is a widely used financial tool based on the time value of money (discounted cash flows). The idea is that money in hand today is worth more than money received tomorrow. Using this foundation, capital budgeting balances inflows with outflows over time to determine the net present value of an investment or its intermal rate of return. Inherent in the use of capital budgeting is the need for management to establish some form of hurdle rate, which is a measure of the value of money over time. The hurdle rate is usually composed of at least three elements: 1) an interest charge or opportunity cost, 2) a measure of return above the interest charge, and 3) a measure of risk A prominent challenge to the use of capital budgeting is that it is information dependent, especially with respect to estimating cash flows. A second drawback to using capital budgeting is that it does not take into account qualitative or strategic issues. Thus, combining capital budgeting with a weighted-factor approach can be very useful in Problem Savage Manufacturing is trying to decide whether to invest in a new CAD system for the design of its new front discharge concrete truck. The initial purchase price for the CAD system from ComputerGlow Graphics would be $12.500 for the hardware, software and initial setup cost. An additional $2,500 would be required to rewire the drafting office for the CAD system This CAD system is expected to reduce design times as well as reducing duplication, reducing engineering changeovers, and improving overal product quality The marketing and accounting departments have provided the following estimates for the after-tax cash flows for the expected savings from the CAD system over its five-year life