FINANCE – Fundamentals Of Capital Budgeting


Section 10.1

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1.      Why capital investments are considered the most important decisions made by a firm’s management?


2.     What are the differences between capital projects that are independent, mutually exclusive, and contingent?


Section 10.2

1.                  What is the NPV of a project?


2.                  If a firm accepts a project with a $10,000 NPV, what is the effect on the value of the firm?

3.            What are the five steps used in NPV analysis?

The five-step process used in the NPV analysis can be listed as follows:


Section 10.3

1.                  What is the payback period?



2.                  Why does the payback period provide a measure of a project’s liquidity risk?


3.         What are the main shortcomings of the payback method?



Section 10.4

1.            What are the major shortcomings of using the ARR method as a capital budgeting method?


Section 10.5

1.      What is the IRR method?


2.      In capital budgeting, what is a conventional cash flow pattern?



3.      Why should the NPV method be the primary decision tool used in making capital investment decisions?


Section 10.6

1.   What changes have taken place in the capital budgeting techniques used by U.S. companies?