About Capital Budgeting: Finance Questions and Answer (Coursework Sample)

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Question 1: Time line diagram and components of the conventional cash flows.
159067548260$2500 $2500 $2500 $2500 $2500 $250000$2500 $2500 $2500 $2500 $2500 $2500
377190012382533337501238252914650123825248602511874520383511200151600199120015
18669003155941 2 3 4 5 6001 2 3 4 5 6180975220345 Cash Inflow
771525396875$1500000$15000119062544450 Cash Outflow
The components of the cash flow
1 Initial investment: This refers to the cash outflow that is invested in the beginning of the period. The time at the initial investment is equal to zero.
2 Annual operating cash flow: this is the incremental cash flow after tax that results from the implementation of a project.
3 Terminal cash flow: this is the non-operating cash flow that is net of tax.
Question 2: How would you know if the project is going to be profitable?
The project is said to profitable if the estimated discounted cash inflow is greater than the initial cost of investment. In other words, if the present value of the cash inflows exceeds the cash outlay for the project it indicates the profitability of the venture (Hall and Millard, 2010, p.85). Net Present Value should be used to determine the viability of the project such that the NPV of a project should always be positive (Muñoz et al., 2011, p.465). With a positive the company’s rate of return becomes greater than its weighted cost of capital.
Question 3: what would be a major risk in a capital budgeting project?
The major risk in capital budgeting is the uncertainty nature of cash flow. This risk varies from one project to another with the one that is perceived to accommodate less uncertainty factors is acceptable. Uncertainties affect all the parameters that determine the net present value (Bennouna, Meredith and Marchant, 2010, p.225). Nonetheless, this risk is usually mitigated using various techniques such as the risk-adjusted discounting and the adjustment of the payback period.
Question 4: What would be the criteria for a successful capital budgeting project?
* Payback Period: the project will be successful if it has the lowest period within which the ini...