Name and describe three key observations that we can make about the capital budgeting decision.
What will be an ideal response?
ANSWER
Answer: There are three key observations we can make about the capital budgeting decision:
1) A capital budgeting decision is typically a go or no-go decision on a product, service, facility, or activity of the firm. That is, we either accept the business proposal or we reject it. The choice of accepting or rejecting a proposed project is the cornerstone of financial management at all levels of a business.
2) A capital budgeting decision will require sound estimates of the time and amount of appropriate cash flow for the proposal. Thus, the appropriate future cash flow is a necessary input into all capital budgeting decisions.
3) The capital budgeting model has predetermined accept or reject criteria. We need to examine the validity of these criteria within each decision model.
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