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 firms 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 one year or less

Planning and controlling investments in assets that are expected to produce cash flows for more than one year

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.

Virginia Hydroponics Co.s acquisition of a new parcel of real estate.

Chicago Pork Producers Inc.s financing of its monthly average amount of accounts receivable.

Phoenix Golf Club Co.s replacement of an existing piece of equipment.

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

Capital investments affect the firms long-term performance and profitability.

Capital investments tend to be expensive.

Capital investments are easily and quickly reversed.