^Capital Budgeting - Page 1 of 1 CAPITAL BUDGETING TEXT...

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Unformatted text preview: Page 1 of 1 CAPITAL BUDGETING TEXT BOOK Capital Budgeting – the whole process of analyzing projects and deciding whether they should be included in the capital budget. Capital Budget – an outline of planned expenditures on fixed assets. Effective capital budgeting will improve both the timing of asset acquisitions and the quality of assets purchased. Hurdle Rate – the minimum acceptable Rate of Return for a capital project … the Discount Rate = i • Most important and most difficult decision in process • Using WACC as the Hurdle Rate will ratchet-up risk • WACC: Weighted Average Cost of Capital • The cost of the next dollar the entity borrows • Higher Return ⇒ Higher Risk … as risk increases, the cost of capital increases TERRENCE Talking about the: • “Fixed Asset” section of Position Statement • “Sources and Uses of Cash for Investing Purposes” on the Cash Flow Statement • the use of a company’s most precious resource … Capital … Cash … for the long-term generation of wealth...
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