Capital_Budgeting - Capital Budgeting (Long Term...

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Capital Budgeting (Long Term Investment) Decisions Chap.12 Dr. Kiani A. What is capital budgeting ? Capital budgeting is the series of long term planning decisions by individual economic units as to how much and where resources will obtained and expended for future use , particularly in the production of future goods and services. B. The scope of capital budgeting encompasses : 1. How money is acquired and from what sources? Sources are: a. Internal= Retained earnings and depreciation b. External= Issue bonds, debt financing, issue stocks(common & preferred) 2. How individual capital project alternatives are identified and evaluated? 3. How minimum requirements of acceptability are set? ---- cost of capital ------ weighted average cost of capital Sources % Specific cost of Capital WACOC RE $3,000,000 .3 .10 .030 DEBT 2,000,000 .20 .15 .030 C/S 4,000,000 .40 .09 .036 P/S 1,000,000 .10 .08 .008 ---------------------------------------------------------------------------------------- 10,000,000 1.00 10.40% ====================================================== 4. How final project selections are made? 5.
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Capital_Budgeting - Capital Budgeting (Long Term...

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