Concept explainers
Capital budgeting process* True or false?
- a. The approval of a firm’s capital budget allows managers to go ahead with any project included in the budget.
- b. Capital budgets and project authorizations are mostly developed “bottom up.” Strategic planning is a “top-down” process.
- c. Project sponsors are likely to be overoptimistic.
a)
To discuss: The items whether true or false on the bases of capital budgeting process.
Explanation of Solution
False. Firm’s capital budget isn’t the ultimate sign-off for the specific projects. Most firms need each project appropriation requests and includes more detailed analysis. The capital budgeting is often pruned and revised according to the market conditions.
b)
To discuss: The item whether true or false on the bases of capital budgeting process.
Explanation of Solution
False, the firm’s capital budget should reflect both bottom-up operational detail as well as top-down strategic views.
c)
To discuss: The item whether true or false on the bases of capital budgeting process.
Explanation of Solution
True because cash flow forecasts are regularly overstated.
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Chapter 11 Solutions
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