Question

For which of the following reasons are capital budgeting decisions important to a business organization? Check all that apply. Capital investments are relatively inexpensive. Capital investments have multiyear life spans, so mistakes linger for a long time. Capital investments are difficult to reverse without incurring large additional expenses.

Answer 1

Answer:

Options a and b are correct.

Explanation:

Capital investments are relatively inexpensive.

Capital investments have multiyear life spans, so mistakes linger for a long time.

Answer 2

Answer:

The correct answers are letters "B" and "C": Capital investments have multiyear life spans, so mistakes linger for a long time; Capital investments are difficult to reverse without incurring large additional expenses.

Explanation:

Firms use Capital Budgeting to determine if a project like building a new plant or developing a new plant is worth pursuing. The three more common capital budgeting approaches are the Net Present Value (NPV), the Internal Rate of Return (IRR) and the Payback Period Methods (PPM).

Capital budgeting must be correctly computed because these estimates are not modified in the short-run. Capital budgets aim to give investors and managers an idea of the necessary resources of the firm over several years. Also, adding information or modifying a capital budget could represent a large investment in a firm since it could imply changing the course of current operations and implement new ones.