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The basics of capital budgeting

Text: One of the most important financial management activities that a firm undertakes is its evaluation and allocation of investment funds to support its future survival and growth. These activities may be motivated by the desire to expand the firm?s revenues, reduce its costs, or satisfy its mandatory or voluntary legal, health, and safety requirements. They may have, more or less, multiyear effects on the organization and may or may not be considered as capital budgeting activities. Capital budgeting is the process of planning and controlling investments in assets that are expected to produce cash flows for one year or less. This statement is . The capital budgeting process in a company involves evaluation of cash flows, risk analysis, correlation with the portfolio of projects in the company etc. To make this process more streamlined, firms identify whether the projects qualify as a capital budgeting project or not and generally analyze them in different vertical categories. Which of the following are examples of a capital budgeting project? Check all that apply. Fresno Furniture Manufacturing Inc.?s replacement of an existing piece of equipment Collins Construction Co.?s acquisition of a new parcel of real estate Florence Fashion Footwear Inc.?s financing of its monthly average amount of accounts receivable For which of the following reasons are capital budgeting decisions important to a business organization? Check all that apply. Capital investments have relatively short life spans, so mistakes are worked through rather quickly. Capital investments tend to reflect the firm?s future activities, markets, and productive technologies. Capital investments tend to require sizable cash outlays.

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