introduction to Finance Name Course Instructor Dat

introduction to Finance Name Course Instructor Date Why is the capital- budgeting process so important?

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Introduction to Finance

INSTRUCTIONS:

Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital- budgeting proposals. Because this is your first assignment, you have been asked not only to provide a recommendation but also to respond to a number of questions aimed at assessing your understanding of the capital- budgeting process. This is a standard procedure for all new financial analysts at Caledonia, and it will serve to determine whether you are moved directly into the capital- budgeting analysis department or are provided with remedial training

CONTENT:

FIN 335: introduction to Finance Name Course Instructor Date Why is the capital- budgeting process so important? Capital budgeting is important to determine the most optimal investment projects, and the management decides on long-term capital expenditures and strategic goals based capital budgeting analysis. b. Why is it difficult to find exceptionally profitable projects? In the competitive markets, firms are attracted to profitable industries driving down the profitability, and firms are unlikely to experience large profits in such markets (Keown, 2003). Firms rely on product differentiation, or a cost advantage approach, and this allows companies to support larger profits. In any case, it is easier to evaluate profitable projects than finding them (Keown, 2003). c. What is the payback period on each project? If Caledonia imposes a 3- year maximum acceptable payback period, which of these projects should be accepted? Project A Payback period= 3 years+ (110,000-90,000)/ 50,000=3.4 years Project B Payback period= 2 years+ (110,000-80,000)/ 40,000= 2.75 years Project B should be accepted as it has a shorter payback period less than the maximum acceptable payback period of 3 years, and it takes a shorter period of time to

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