MHA 706 - Mod 6 pt2 - The Basics of
Capital Budgeting
What are the three classifications of Capital Budget? - answer- Mandatory Replacement
(simple analysis)
- Expansion of existing services
- Expansion into new services (may require higher level approval)
What is the purpose of Financial Analysis for For-profit and Not-for-Profit? - answer For-
Profit: Projects that contribute to shareholder wealth
Not-for-Profit: Projects expected effect on business financial condition.
What are the four parts in Capital Budgeting Financial Analysis? - answer1) Estimate
the Cash Flows
2) Assess the project's riskiness
3) Estimate the project cost of capital
4) Measure the financial impact
What is another term for Initial Cash Outlay? - answer Cost
What is Operating Flows in the Cash Flow concept? - answerThe revenue and the cost
of the equipment
What is the Terminal Flow in the Cash Flow concept? - answerSalvage value or
expected value of asset at end of its productive life
What is Project Cost of Capital also known as? Why is it important? -
answerOpportunity Cost of Capital or Discount Rate
Reviews the commitment of debt to invest in the project
What are the 9 Key Concepts of Cash Flow Estimation? - answerFocus on:
- Cash Flow instead of Accounting Income
- Incremental cash flow
- Cash Flow timing (annually instead of daily)
- Project life of the investment (truncated if long)
Incorporate:
- Opportunity costs for capital and other resources
Consider:
Capital Budgeting
What are the three classifications of Capital Budget? - answer- Mandatory Replacement
(simple analysis)
- Expansion of existing services
- Expansion into new services (may require higher level approval)
What is the purpose of Financial Analysis for For-profit and Not-for-Profit? - answer For-
Profit: Projects that contribute to shareholder wealth
Not-for-Profit: Projects expected effect on business financial condition.
What are the four parts in Capital Budgeting Financial Analysis? - answer1) Estimate
the Cash Flows
2) Assess the project's riskiness
3) Estimate the project cost of capital
4) Measure the financial impact
What is another term for Initial Cash Outlay? - answer Cost
What is Operating Flows in the Cash Flow concept? - answerThe revenue and the cost
of the equipment
What is the Terminal Flow in the Cash Flow concept? - answerSalvage value or
expected value of asset at end of its productive life
What is Project Cost of Capital also known as? Why is it important? -
answerOpportunity Cost of Capital or Discount Rate
Reviews the commitment of debt to invest in the project
What are the 9 Key Concepts of Cash Flow Estimation? - answerFocus on:
- Cash Flow instead of Accounting Income
- Incremental cash flow
- Cash Flow timing (annually instead of daily)
- Project life of the investment (truncated if long)
Incorporate:
- Opportunity costs for capital and other resources
Consider:
