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Important administrative considerations

Question 1 of 8
What are the important administrative considerations in the capital budgeting process?

Question 2 of 8
Why does capital budgeting rely on analysis of cash flows rather than on net income?

Question 3 of 8
What are the weaknesses of the payback method?

Question 4 of 8
What is normally used as the discount rate in the net present value method?

Question 5 of 8
What does the term mutually exclusive investments mean?

Question 6 of 8
How does the modified internal rate of return include concepts from both the traditional internal rate of return and the net present value methods?

Question 7 of 8
If a corporation has projects that will earn more than the cost of capital, should it ration capital?

Question 8 of 8
What is the net present value profile? What three points should be determined to graph the profile?

Solution Preview

1. What are the important administrative considerations in the capital budgeting process?

Capital budgeting is the process undertaken, by a firm, to ascertain the most profitable use of its capital resources. In capital budgeting there exists important milestones. These are also the administrative processes which include identifying the best projects, ascertaining their cash flows, computing the best discount rate and actually applying the same rate to the projects to ascertain viability.

2. Why does capital budgeting rely on analysis of cash flows rather than on net income?

Net income basis of accounting is a measure that is fundamentally different from cash basis accounting. The major difference is in the accrual concept. The accrual concept allows expenses or income from future or past time period to be included in the current period.

Theoretically the accrual method would produce potentially invalid results if results, of other time periods, are included in the periods for which the capital ...

Solution Summary

The solution discusses what are the important administrative considerations in the capital budgeting process.

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