Capital Budgeting Week 7 Discussions

Capital Budgeting Gradedpart 1welcome To Week 7 Discussions Lets

Define capital budgeting and decision making. What is capital budgeting? What are the differences between screening decisions and preference decisions? Do you ever have occasion to make capital budgeting decisions in your personal life?

For multiple choice questions, explain why the answer chosen is correct and why the other choices are not correct. Support your response.

Use the following to answer Questions 4: The following information has been provided by Evans Retail Stores Inc. for the first quarter of the year. Sales $350,000; Variable selling expenses $35,000; Fixed selling expenses $25,000; Cost of goods sold (variable) $160,000; Fixed administrative expenses $55,000; Variable administrative expenses $15,000. The gross margin of Evans Retail Stores Inc. for the first quarter is:

  • A) $210,000
  • B) $140,000
  • C) $220,000
  • D) $190,000

Use the following to answer Questions 2: The following selected data pertain to Beck Co.'s Beam Division for last year. Sales $400,000; Variable expenses $100,000; Traceable fixed expenses $250,000; Average operating assets $200,000; Minimum required rate of return 20%. How much is the residual income?

  • A) $40,000
  • B) $50,000
  • C) $10,000
  • D) $80,000

Paper For Above instruction

Capital budgeting is a crucial financial management process that involves evaluating and selecting long-term investment projects. It encompasses the identification, analysis, and selection of projects or investments that are expected to generate value for an organization over time. Decision making in capital budgeting is fundamentally about determining which projects to undertake based on their potential to generate returns that exceed their costs. This process plays a significant role in shaping a company's strategic direction and ensuring optimal allocation of scarce resources.

In the context of decision making, two primary types of decisions are often distinguished: screening decisions and preference decisions. Screening decisions involve the initial evaluation of potential investment opportunities based on predetermined criteria, such as payback period, net present value (NPV), or profitability index. These decisions serve as a filter to identify projects that meet minimum standards of acceptability. Preference decisions, on the other hand, arise after screening and involve ranking—or prioritizing—the filtered projects based on additional factors such as strategic alignment, risk levels, or managerial preferences. Thus, screening decisions determine feasibility, while preference decisions determine priority.

On a personal level, individuals often make capital budgeting decisions in their everyday lives. For example, deciding whether to purchase a new vehicle involves evaluating the cost, benefits, and financing options—a form of personal capital budgeting. Similarly, choices related to education, home improvements, or investments in retirement plans are all personal examples of capital budgeting decisions where individuals allocate their finite resources to maximize personal benefits over time. These decisions often require assessing costs and benefits, considering alternatives, and aligning them with personal goals and constraints.

Turning to financial calculations, the gross margin for Evans Retail Stores Inc. can be determined by subtracting the cost of goods sold from total sales:

Gross Margin = Sales - Cost of Goods Sold (Variable)

Gross Margin = $350,000 - $160,000 = $190,000

Thus, the correct answer for the gross margin is D) $190,000. This calculation excludes expenses such as selling and administrative costs because gross margin focuses solely on sales and direct costs associated with goods sold.

Next, for Beck Co.’s Beam Division, residual income is calculated as follows:

Residual Income = Operating Income - (Average Operating Assets x Minimum Required Rate of Return)

First, we need to determine the Operating Income:

Operating Income = Sales - Variable Expenses - Traceable Fixed Expenses

Operating Income = $400,000 - $100,000 - $250,000 = $50,000

Then, residual income:

Residual Income = $50,000 - ($200,000 x 20%) = $50,000 - $40,000 = $10,000

Therefore, the correct answer is C) $10,000.

In conclusion, understanding capital budgeting and the associated decision-making processes is vital for both organizations and individuals. Recognizing the distinction between screening and preference decisions enhances the effectiveness of investment analysis. Moreover, applying quantitative methods like gross margin and residual income calculations provides a solid foundation for evaluating potential projects and financial performance, ultimately aiding strategic allocation of resources and long-term planning.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance (12th ed.). McGraw-Hill Education.
  • Damodaran, A. (2015). Applied Corporate Finance (4th ed.). Wiley.
  • Gitman, L. J., & Zutter, C. J. (2015). Principles of Managerial Finance (14th ed.). Pearson.
  • Ross, S. A., & Westerfield, R. (2020). Essentials of Corporate Finance (4th ed.). McGraw-Hill Education.
  • Kelley, T. (2018). Personal Financial Planning. Cengage Learning.
  • Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Cengage Learning.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. (2014). Financial Statement Analysis. McGraw-Hill Education.
  • Chapman, C. D. (2015). Strategic Investment Decisions. John Wiley & Sons.

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