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Capital Budgeting, Leasing

Please discuss the following three questions.

1. Which decision-making criteria is the best to use for capital budgeting decisions? Why?
2. How can risk be addressed in the capital budgeting process?
3. When is it preferable to lease, as opposed to purchase, capital assets?

Solution Preview

Use has been made of materials at the following sites in answering the questions:
http://www.accountancy.com.pk/pr_pg_article.asp?id=152
http://www.sba.gov/test/wbc/docs/finance/lease_basics.html

1 Which decision-making criteria is the best to use for capital budgeting decisions? Why?

NPV (Net Present Value) method is the best to use for capital budgeting decisions. The net-present-value (NPV) method is a discounted-cash-flow approach to capital budgeting that computes the present value of all expected future cash flows using a minimum desired rate of return.
As a decision criterion, this method is used to make a choice between mutually exclusive projects. On the basis of NPV method, various proposals would be ranked in order of the net present values. The project with highest NPV would be assigned the first rank, followed by others in descending orders.
This method has several advantages over other methods:
The first and probably most significant ...

Solution Summary

The solution discusses which decision-making criteria is the best to use for capital budgeting decisions, the way risk can be addressed in the capital budgeting process and when is it preferable to lease, as opposed to purchase, capital assets.

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