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25 May 2018

Capital Budgeting and Dividend Policy.

Critically reflect on the importance of selecting the right projects in which to invest capital. Do we always select those projects that have the highest return on investment? What other factors play into capital budgeting decisions?

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Nestor Rutherford
Nestor RutherfordLv2
26 May 2018

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PLEASE HELP WITH A RESPONSE TO THE POST BELOW. Thank you :)

  1. How do we traditionally define capital budgeting infinance?
  • Capital budgeting is a technique used in Finance by companiesto evaluate and rank the investment projects. These are the largeexpenditure projects including the purchase of plant and equipment,investment in new business, construction of buildings etc.
  1. What is the purpose of capital budgeting in the business firm,and how is it used?
  • Capital budgeting calculation involves cash flows withconversion into time value of money and arriving at a profit. Thereare several methods used for evaluating capital budgeting projects.Payback period method, Net present value method, internal rate ofreturn method and profitability index. All of these methods help amanager to analyze and select the projects based on profitabilityand returns. It is used to help the managers in arriving atinvestment decisions compared with the cost of capital. They alsogive the knowledge of time period within which cash outflows willbe returned. Large businesses rely on NPV and IRR to takeinvestment decisions. This technique provides a real return valuefor a business rather than just calculating the profits.Traditional accounting involves making decisions based on profitswithout considering the time value of money. Capital budgetingtechnique helps the manager to take decisions with present valuesof future returns.

Critically reflect on the importance of the risk and return balance. Consider the following:

  • Can we ever have any return without some type of risk?
  • If you take on a large risk, are you guaranteed a large return? Why or why not?
  • What other factors play into risks that are not covered in the video?
  • When have you had to consider risk and return in personal or professional decision-making?

We examined two important topics in finance this week: (a) present and future values and (b) security valuation.

Critically reflect on the importance of present and future values. What factors must be considered when calculating present and future values? What other qualitative factors play into present and future value decisions? Perhaps you have opportunities in your professional life to use present and future values. What are some real or potential applications of these concepts?

We also looked at expected returns. Why do bond values go down when interest rates go up? Is this true in the opposite direction?

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