12.6. Financial Decision-Making in Organizations

Try these first

1. 1.

   What is capital budgeting?

   Hint

   It involves planning for future financial projects.

2. 2.

   What do financing decisions involve?

   Hint

   Think about how companies raise money.

3. 3.

   What does NPV stand for?

   • Net Positive Value
   • Net Present Value
   • Net Profit Value

   Hint

   It relates to present value calculations.

4. 4.

   True or False: Working capital management focuses only on long-term investments.

   • True
   • False

   Hint

   Short term vs. long term.

5. 5.

   A startup is considering two projects: Project A which costs $50,000 has projected inflows of$10,000 for the first three years and $30,000 in year four. Project B costs$60,000 with inflows of $20,000 for the first three years and$10,000 in year four. If the discount rate is 8%, which project should they invest in?

   Hint

   Use the formula NPV = ∑ Cash inflows / (1+r)^t and compare results.

6. 6.

   A company must decide to pay a dividend of $5 per share or retain the profits for expansion. The expected return on reinvestment is 15%. If the company has 10,000 shares, calculate the potential benefit of reinvesting over one year versus paying the dividend.

   Hint

   Consider long-term growth versus immediate payouts.