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Discussion question 1, page 1130
What is capital budgeting? Why are capital budgeting decisions crucial to the long-run financial health of a business enterprise?
The term Capital Budgeting refers to long term planning for proposed capital outlays and financing normally persuant to plant assets. It includes such items as raising long-term funds and their utilization within the organization. Decisions regarding Capital Budeting is one of the most important decisions, that affect long run financial health of a business. It also has a major impact on the shareholders wealth in the long run. "Not only do they require that resources be committed for long periods of time, they are also difficult or impossible to reverse once funds have been invested and a project has begun (Mcgraw-hill)"
Chapter 26
Exercise 26.1, Pages 1131-1132 The following are ten technical accounting terms introduced or emphasized in this chapter.
Net present value Present value
Capital budgeting Sunk Cost
Incremental Analysis Salvage value
Discount Rate Return on average inv
Payback period Capital budget audit
Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the accounting term discussed, or answer "None" if the statement does not correctly describe any of the terms.
a. Examination of differences among revenue, costs, and cash flows under alternative courses of actions. b. A cost incurred in the past that cannot be changed as a result of future actions. c. The process of planning and evaluating proposals for investments in plant assets. d. The average annual net income from an investment expressed as a percentage of the average amount invested. e. The length of time necessary to recover the entire cost of an investment from resulting annual net cash flows. f. The present value of an investment's expected future cash flows. g. The amount of money today that is considered equivalent to the cash flows...