How can I explain these? Limitations of Capital BudgetingAlthough capital budgeting provides a lot of insight into the future prospects of abusiness, it cannot be termed a flawless method after all. In this section, we learnabout some of the limitations of capital budgeting.LIMITATIONS OF CAPITAL BUDGETINGCash FlowsTime HorizonTime ValueDiscount Rates Cash FlowIt is a simple technique that determines if an enhanced value of a project justifies therequired investment. The primary reason to implement capital budgeting is toachieve forecasting revenue a project may possibly generate. The problem could bethe estimate itself. All the upfront costs or the future revenue are all only estimates atthis point. An overestimation or an underestimation could ultimately be detrimental tothe performance of the business.Time HorizonUsually, capital budgeting as a process works across for long spans of years. Whilethe shorter duration forecasts may be estimated, the longer ones are bound to bemiscalculated. Therefore, an expanded time horizon could be a potential problemwhile computing figures with capital budgeting.Besides, there could be additional factors such as competition or legal ortechnological innovations that could be problematic.Time ValueThe payback period method of capital budgeting holds a lot of relevance, especiallyfor small businesses. It is a simple method that only requires the business to repay inthe predecided timeframe. However, the problem it poses is that it does not count inthe time value of money. This is to say that equal amounts (of money) have differentvalues at different points in time.

We have to explain the limitations of capital budgeting techniques.

Limitations of Capital Budgeting Although capital budgeting provides a lot of insight into the future prospects of a ousiness, it cannot be termed a flawless method after all. In this section, we learn about some of the limitations of capital budgeting. LIMITATIONS OF CAPITAL BUDGETING Cash Flows Time Horizon Time Value Discount Rates

Limitations of Capital Budgeting Although capital budgeting provides a lot of insight into the future prospects of a ousiness, it cannot be termed a flawless method after all. In this section, we learn about some of the limitations of capital budgeting. LIMITATIONS OF CAPITAL BUDGETING Cash Flows Time Horizon Time Value Discount Rates

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 4QTD

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Risk in capital budgeting implies that the decision maker knows _ of the cash flows. Fill in the blanks with correct option. A. Variability B. Certainity C. Probability D. None of these
True or false? One way to address risk for a capital budgeting problem is to conduct scenario analysis
QUESTION #1: Which of the following is a disadvantage of using the IRR method of capital budgeting over other types: A- IRR does not consider the time and value of money. B- IRR assumes reinvestment of project cash flows at the same rate as the IRR C- IRR ignores the prudent simplicity of paybacks D- None of the above QUESTION #2: The net present value (NPV) of an investment is___________. A- The present value of all benefits (cash inflows) B- The present value of all costs (cash outflows) of the project C- The present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project D- The present value of all benefits (cash outflows) minus the present value of all costs (cash inflows) of the project
Risk in capital budgeting implies that the decision maker knows _ of the cash flows. A. Variability B. Certainity C. Probability D. None of these
Capital Budgeting Problem What are some of the difficulties that might come up in actual applications of the various criteria we discussed in this chapter? Which one would be the easiest to implement in actual applications? The most difficult?
Which of the following is a problem associated with capital budgeting? Select all that apply. Long-term strategic planning for resource allocation Unsustainable budget infrastructure that will have an impact on future generations Miscalculating or poor estimation of projected costs Fluctuating economics and financial markets
One of the modern methods of Capital Budgeting is: a. Profitability index b. Accounting Rate of Return c. None of these d. Payback period
What is capital budgeting? Compare the advantages and disadvantages of various capital budgeting techniques. Do you think NPV is the best decision criterion and it can overcome the problems inherent in other methods? Justify your answer.
Which of the following is a problem with using payback period for capital budgeting decisions bias against long term projects in favor of short term projects bias against short term projects in favor of long term projects time value of money conceptual violation
One of the modern methods of Capital Budgeting is: O a. Profitability index O b. Accounting Rate of Return O c. Payback period d. None of these
Discuss the notions of conventional and nonconventional cash flows in capital budgeting. Which investment evaluation criteria would you use for unconventional cash flows and why? Provide a fictitious unconventional cash flow example and apply the payback period, NPV, IRR, MIRR, and PI methods to your example. Interpret the results.
Which of the following is not a capital budgeting technique? Select one: a. Net present value b. Discounted Payback period c. Payback Period d. Profitability index e. Ratio Analysis Which capital budgeting projects are preferred? Select one: a. Lower payback period b. None of the option c. Higher payback period d. Lower cash inflow projects e. Average payback period