Week 8: Capital Budgeting Decisions and the Time Value of Money
Let’s start with defining capital budgeting. What is capital budgeting? What are the differences between screening decisions and preference decisions?
Additional Questions for Week #8:
- Capital Budgeting
- What is capital budgeting? What are the differences between screening decisions and preference decisions?
- What type of management decisions utilize the time value of money?
- Why is it important to consider both cash inflows and outflows, along with their timing, to make good capital investment decisions?
- Please discuss the pros and cons of the payback method, net present value, and internal rate of return. Which method is used by your past or present employer? Which method do you prefer?
- How do you calculate the weighted average cost of capital (WACC), and why is it important in capital budgeting?
- What are the advantages and disadvantages of using discounted cash flow (DCF)analysis in capital budgeting?
- Describe the concept of opportunity cost and how it relates to capital budgeting decisions.
- What are some common pitfalls to avoid when making capital budgeting decisions?
- How does inflation affect capital budgeting decisions, and what adjustments can be made to account for it?
- Explain the difference between mutually exclusive and independent projects in capital budgeting.
- How can sensitivity analysis and scenario analysis be used to improve capital budgeting decisions?
- What role does risk play in capital budgeting, and how can it be assessed and managed?