Troy University Capital Budgeting and Responses Discussion


Business Finance

Troy University

Question Description

I'm working on a management discussion question and need guidance to help me understand better.

  1. What is the most critical step in the capital budgeting process? Why are there no "absolute" answers to capital budgeting decisions? 
  2. How does a firm assess a new capital project? How would models of project value such as NPV and IRR incorporate changes in economic outlook? What are other capital budgeting criteria besides NPV and IRR?

1. The most critical step in the capital budgeting process is evaluating the project to make sure it is credible.  It is also important to compare it against other types of capital and budgeting. There is no absolute answer to capital budgeting decisions because there are many variables that can not be accurately computed. Alternative options and evaluating project details can cause these variables, therefore, capital budgeting decisions do not provide a very reliable answer.  

2. A company typically assesses a new capital project by looking at a proposal and evaluating the intricacies of the project. It is also important for them to compare the current offering against other options and decide based on the breakdown of the financial structure and its possible future gains. From there, they will choose the option that seems to provide the best returns. NPV and IRR models let companies evaluate the inflow and outflows of money. They also let them calculate the discount cash flows and multiple discount rates. Another capital budgeting criterion is the future value. The future value may be a good tool for companies to use because it can evaluate the effectiveness of the current structure. It also lets companies predict future potential by using their current numbers. 

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Explanation & Answer

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Capital Budgeting

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Capital Budgeting
Capital budgeting is a multi-step process employed by enterprises or companies to
determine if an investment or project is worthwhile. It is comprised of five crucial steps:
identifying and evaluating potential investments or projects; estimating the costs involved in the
operation and implementation of the feasible investment opportunity identified; estimating the
cash flow of the investment or project chosen; assessing the risks associated with the investment;
and implementing the project (Lakew, 2017). Out of these steps, identifying and evaluating
potential investments or projects is the most critical step in capital budgeting. This step is very
critical because the promoter has to explore available opportunities and identify the mo...

FvyirfgreCuQ (449)
Boston College

Really useful study material!