Resource: Capital Budgeting Worksheet
Choose a scenario from the Capital Budgeting Worksheet to review and analyze. Using net present value, determine the proposal's appropriateness and economic viability.
Prepare a report explaining your calculations and conclusions. Answer the following in your report:
? Explain the effect of a higher or lower cost of capital on a firm's long-term financial decisions.
? Analyze the use of capital budgeting techniques in strategic financial management.
Format your report consistent with APA guidelines.
Capital Budgeting Worksheet
Cost of Capital
The cost of capital is one of the most important factors in deciding a firm's capital structure and hence, impacts long-term financial decision making. This is so because cost of capital directly impacts the firm's value which is related to its shareholders' wealth maximization objective. As Pagano and Stout (2004) said, "[the] idea of the "cost of capital" is fundamental to what managerial finance and accounting professionals do, directly or indirectly, as part of their participation on cross-functional decision teams" (p. 13). This means that the cost of capital pervades the entire organization and not only its long-term financial decision making process.
It is therefore obvious that "[one] of the continuing challenges in financial management is determining the cost of capital" (Cotner & Fletcher, 2000, p. 27) that will result to the most value. This means that if a higher or lower cost ...
The expert uses the capital budgeting worksheets. The effect of a higher or lower cost of capital on a firm`s long-term financial decisions are examined.