Question

The capital budgeting process is comprehensive and is based on certain assumptions, models, and benchmarks. This process often begins with a project analysis. Generally, the first step in a capital budgeting project analysis—which occurs before any evaluation method is applied—involves estimating the ________?
A- Revenues from all new projectsB- Project's expected cash flowsC- Company's net income

Answer 1

Answer:

The correct answer is letter "B": Project's expected cash flows.

Explanation:

Capital budgeting is a planning method used by businesses to decide which new projects to invest in and how to fund them. The types of projects evaluated in capital budgeting include large expenditures such as the construction of a new factory, the acquisition of new equipment, the development of a new product or the purchasing of another company.

In the beginning, it is crucial to estimate the firm's cash flows to determine how much funds will be available for investing and covering expenses. If insufficient, the company must look for forms of raising capital such as issuing investment vehicles such as stock or bonds or relying on financial institutions through loans.