Module 3 - Lecture 3

Question 1

Define capital budgeting?

Answer 1

Capital budgeting is the planning process used to determine whether a firm’s long term investments such as new machinery, replacement machinery, new plants, new products and research development projects are worth pursuing

Question 2

What industries is capital budgeting most prevalent in

Answer 2

1st: Financial services
2nd: Building, construction, utilities
3rd: Extraction, manufacturing, and non-financial services industries

Question 3

What are the 4 main types of capital budgeting methods?

Answer 3

1) Accounting Rate of Return (ARR)
2) Payback Period
3) NPV
4) IRR

Question 4

What are some assumptions of the WACC?

Answer 4

• Investment sources in proportion with firm wide WACC

- Risk profile of the company is identical to the risk profile of the investment

Question 5

Define uncertainty.

Answer 5

The gap between information currently available and the the total information set required to make a decision

Question 6

What 3 non-financial uncertainty effects are not considered by NPV?

Answer 6

1) Social uncertainty
2) Market uncertainty
3) Input uncertainty (quality of Labour, Materials etc.)

Question 7

How may humans affect capital budgeting?

Answer 7

Thy may predict higher cash flows to get a higher NPV for the project

Question 8

What do Zannibi and Pike (1996) find about consensus between managers at different levels? What does this mean for capital budgeting?

Answer 8

Higher levels of management show less consensus with one another than lower levels of management. This may make capital budgeting more difficult.

Question 9

What do Zannibi and Pike 919960 say about manager stubbornness?

Answer 9

More experienced managers are more likely to stick with their own way of doing things rather than looking at technical CB analysis