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