The basics of capital budgeting

One of the most important financial management activities that a firm undertakes is its evaluation and allocation of investment funds to support its

future survival and growth. These activities may be motivated by the desire to expand the firm's revenues, reduce its costs, or satisfy its mandatory or

voluntary legal, health, and safety requirements. They may have, more or less, multiyear effects on the organization and may or may not be

considered as capital budgeting activities.

Capital budgeting is the process of planning and controlling investments in assets that are expected to produce cash flows for more than one year. This

statement is:

True

False

The capital budgeting process in a company involves evaluation of cash flows, risk analysis, correlation with the portfolio of projects in the company

etc. To make this process more streamlined, firms identify whether the projects qualify as a capital budgeting project or not and generally analyze

them in different vertical categories.

Which of the following are examples of a capital budgeting project? Check all that apply.

National Transmissions Inc.$\text{'}$s purchase of a new building.

Aberdeen Petroleum Refiners Corp.$\text{'}$s purchase of monthly office supplies.

Wellington Industries Inc.$\text{'}$s expenditures for the company's advertising campaign.

For which of the following reasons are capital budgeting decisions important to a business organization? Check all that apply.

Capital investments have multiyear life spans, so mistakes linger for a long time.

Capital investments are difficult to reverse without incurring large additional expenses.

Capital investments are relatively inexpensive.