Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 20

C.W. Yale, president of Hotchikiss, Inc., a client of yours, recently attended a seminar at which a speaker discussed the planning and control of capital expenditures, which he described as capital budgeting. Yale tells you he is not quite sure he understands the concept.

Required

1. Explain the nature of capital budgeting and provide several examples of capital-budgeting decisions.

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2. What are the basic differences between the payback period decision model and the net present value (NPV) model? Explain.

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3. Define the term weighted-average cost of capital (WACC). Of what importance is the concept of WACC to the capital-budgeting process?

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4. Financial accounting data are not entirely suitable for use in making capital-budgeting decisions. Explain.

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5. Explain the role of the post-audit in the capital-budgeting process.

Step 1 of 5

1. Capital budgeting is a process of assessing projects that require commitments of large sums of funds and that generate benefits stretching well into the future. Examples of capital budgeting projects include: purchase of new manufacturing equipment, acquisition of new facilities, development and introduction of new products, and expansion into new sales territories. (Additional examples are offered at the beginning of the chapter.)