Question

1. Define the net investment for a capital budgeting project. What is included in a capital budgeting project’s net investment?

2. Capital budgeting projects can be classified according to the purpose of the project. List and explain the three categories for classifying projects according to their purpose.

3. The impact of indirect effects of a capital budgeting project should be included in cash flow estimation. Give some examples of indirect effects, and explain why they are important and should be considered in the capital budgeting decision process.

Answer 1

1. Capital bugeting is one of the important consideration for the organisation. As they incurs a lot on it they needs to be given proper care. Net investment is the investmnet made by the firm less the depreciation charged on those assets. So, it is basically the amount spentby the organisation minus the cost of depreciation. It is the net investment that a frm makes and wants to evaluate the decision on the basis on this.

In net investment, the initial outlay is included apart from amount involved in maintaining and improving the assets. It is cumulation of all amounts that a firm invest either in maintaining or improving apart frominitial investment.