Question

The ultimate goal of the capital budgeting process is to ________.A) determine the effect of the decision to accept or reject a project on the firm's cash flowsB) determine how the consequences of making a particular decision affects the firm's revenues and costsC) forecast the consequences of a list of future projects for the firmD) list the projects and investments that a company plans to undertake in the future

Answer 1

Answer:

A) determine the effect of the decision to accept or reject a project on the firm's cash flows

Explanation:

Capital budgeting is the method of determining which investment a firm should undertake based on the project's cash flows. If there are no preconditions or constraints, the rational decision would be to choose the project that maximises profit and has the greatest positive impact on cash flow.

There are different capital budgeting methods. They include:

1. The Net present value: The net present value is the present value of after tax cash flows from an investment minus the amount invested. If the net present value is positive it means the project can be undertaken. In comparing more than one projects, the project with the higher net present value should be chosen.

2. The internal rate of return: The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

3. The payback period: The payback period measures how long it takes for the amount invested in a project to be recouped from the cummulative cash flow.

The ultimate goal of capital budgeting is to determine the effect of the decision to accept or reject a project on the firm's cash flows.

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