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Answer the following questions in your notebook 1

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Answer the following questions in your notebook.1.Whys is capital budgeting important in business?2.Explain briefly what is “risk-return -trade off” in your own words.3.What are the steps in capital budgeting?
17GlossaryCapital Budgeting-It is the process of evaluating and selecting long-terminvestments that are consistent with the firm’s goal of maximizing owners’wealth.Long-term investment-results in benefits to accrue to the company in excessof one year.Operating expenses-benefits the company only within the operating period.Independent Projects- are those whose cash flows are independent of oneanother. The acceptance of one project does not eliminate the others fromfurther consideration.Mutually Exclusive Investments- are projects which serve the same functionand therefore compete with one another. The acceptance of one eliminatesall other proposals that serve a similar function from further consideration.Unlimited FundsThe amount and availability of funds affects the company’sdecisions in capital outlays. If the company has unlimited funds, then allprojects which pass the risk-return criteria will be accepted andimplemented.Capital Rationingwill accept only projects which provide the bestopportunity to increase shareholder wealth.Accept-Reject approach- is usually done for mutually exclusive projects whereone project is favored over the others. The approach accepts projects whichpass a certain criteria.Ranking Approaches- is done when there are several projects passing thecriteria and the company is only able to fund so much. The highest-rankingprojects will be selected for implementation.Payback MethodThis is the simplest method used in capital budgeting. Itmeasures the amount of time, usually in years, to recover the initial investment.Net Present Value (NPV)This method is more sophisticated than the paybackmethod since it considers the time value of money and it considers all the cashflows during the life of the project including the terminal value.Internal Rate of Return (IRR)The IRR is one of the most widely used techniquesin capital budgeting. It is defined as the discount rate that equates the NPV ofan investment to zero.
18ReferencesBusiness FinanceTeaching Guide for Senior High School. Published by the Commission on Higher Education,2016 Chairperson: Patricia B. Licuanan, Ph.D. (Page 268- 284)Long Term Finance Definition and importance.© 2021 The World Bank Group Accessed:January 27, 2021Pre-Assessment. ProProfs Quizzes. The financial Planning Process. Concept Of Risk AndReturn Accessed: January 28, 2021()()()

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