25.1. Meaning and Importance of Capital Budgeting

Try these first

1. 1.

   What is capital budgeting?

   Hint

   Think about investments that last for a long time.

2. 2.

   Why is capital budgeting important?

   Hint

   Consider how these decisions affect a company’s future.

3. 3.

   What does capital budgeting primarily focus on?

   • Short-term gains
   • Long-term investments
   • Daily expenses

   Hint

   Think about investments that require a lot of planning.

4. 4.

   True or False: Once a capital budgeting decision is made, it can be easily reversed.

   • True
   • False

   Hint

   Consider the nature of long-term commitments.

5. 5.

   A company has to decide between two projects: Project A requires a $1 million investment and promises$250,000 annually for 5 years, while Project B requires $800,000 and promises$200,000 annually for 6 years. Calculate the NPV for both with a 5% discount rate and decide which project is better.

   Hint

   Consider how each project's cash flow timing affects the outcome.

6. 6.

   Discuss how a small startup might incorporate risk management into its capital budgeting process. Provide examples of specific strategies.

   Hint

   Think about how small businesses might limit their financial exposure.