What is the primary objective of capital budgeting in a firm?

To maximize profits and minimize cost expenditures.

Fill in the blank: Capital budgeting is essential due to the ___ nature of capital expenditures, which are often irreversible.

Long-term

True or False: The capital budgeting process includes a step for fixing property after evaluating investment proposals.

False. The correct step is 'Fixing priorities' based on profitability and economic considerations.

What method in capital budgeting involves adjusting cash inflows for risk by varying the discount rate?

Risk-adjusted cutoff rate method.

Describe the role of performance review in the capital budgeting process.

The performance review stage compares actual results with expected results, identifying any discrepancies to improve future project decisions.

True or False: Capital budgeting decisions can easily be reversed without significant losses.

False. Capital budgeting decisions are typically irreversible and difficult to change without incurring substantial losses.

What does the coefficient of variation measure in the context of capital budgeting?

It measures the relative risk of different projects by comparing the standard deviation of cash inflows to the expected returns.

Fill in the blank: In capital budgeting, a project is deemed more risky if it has a higher ___ of cash inflows.

Standard deviation

Identify one challenge that capital budgeting faces due to the nature of future predictions.

The inherent uncertainty in forecasting future cash inflows and outflows, which can lead to inaccurate investment decisions.

What are the primary steps involved in the capital budgeting process?

Capital budgeting requires multiple steps.

• Identify investment opportunities.

• Evaluate proposals for viability.

• Review performance versus projections.