Reading 44: Capital Budgeting-LOS b 习题精选

2011, principles, statements, budgeting, following

Session 11: Corporate Finance
Reading 44: Capital Budgeting

LOS b: Discuss the basic principles of capital budgeting, including the choice of the proper cash flows.

Ashlyn Lutz makes the following statements to her supervisor, Paul Ulring, regarding the basic principles of capital budgeting:

Statement 1: The timing of expected cash flows is crucial for determining the profitability of a capital budgeting project.

Statement 2: Capital budgeting decisions should be based on the after-tax net income produced by the capital project.

Which of the following regarding Lutz’s statements is most accurate?

Statement 1

Statement 2

Correct

Incorrect

Correct

Lutz’s first statement is correct. The timing of cash flows is important for making correct capital budgeting decisions. Capital budgeting decisions account for the time value of money. Lutz’s second statement is incorrect. Capital budgeting decisions should be based on incremental after-tax cash flows, not net (accounting) income.

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发表于 2011-3-23 15:34 | 只看该作者

Financing costs for a capital project are:

A)	subtracted from the net present value of a project.

B)	captured in the project’s required rate of return.

C)	subtracted from estimates of a project’s future cash flows.

Financing costs are reflected in a project’s required rate of return. Project specific financing costs should not be included as project cash flows. The firm's overall weighted average cost of capital, adjusted for project risk, should be used to discount expected project cash flows.

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发表于 2011-3-23 15:35 | 只看该作者

Mason Webb makes the following statements to his boss, Laine DeWalt about the principles of capital budgeting.

Statement 1: Opportunity costs are not true cash outflows and should not be considered in a capital budgeting analysis.

Statement 2: Cash flows should be analyzed on an after-tax basis.

Should DeWalt agree or disagree with Webb’s statements?

Statement 1

Statement 2

Agree

Disagree

Agree

DeWalt should disagree with Webb’s first statement. Cash flows are based on opportunity costs. Any cash flows that the firm gives up because a project is undertaken should be charged to the project. DeWalt should agree with Webb’s second statement. The impact of taxes must be considered when analyzing capital budgeting projects.

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