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    Capital Budgeting (h)

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    "Capital Budgeting"

    Answer the following questions:

    1)There is uncertainty in the market research forecasts from which you derive information to include in your own volume and price inputs for a financial proposal. How do you incorporate this uncertainty into your analysis?

    2)If the land, which would be used for the project is already owned by the company and has an opportunity value. How would you measure the value of the land in its next best use? What costs would you look for that might be sunk costs and irrelevant in this analysis?

    (Question also in attachment)

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    Solution Preview

    There is uncertainty in the market research data with respect to the volume and price for the products to be produced. Typically the market research forecasts are given in terms of confidence levels. Usually the levels of confidence are 95%. This gives us a range of values for the volume demanded and the price which would be realizable. In a financial proposal, one can mention the confidence level and quote the price and volume given by the market research agency. However, following the doctrine of conservatism, the most unfavorable figures should be used for the analyses.

    Please remember - It should be seen whether there would be sufficient demand in future for the increased production because of additional ...