Basics of Capital Budgeting Evaluating Cash Flows
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- Published
- 25 Oct 2021
- Last updated
- 28 May 2026
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Explanation
When a company undertakes large-scale expansion projects, the associated higher risk and flotation costs generally lead to an increase in the marginal cost of capital. This means that raising additional funds becomes more expensive as the firm takes on more risk and incurs higher issuance costs.
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Practice related questions from the same subject.
- 1.Which of the following techniques are used to assess the viability of investment projects?
- 2.What do we call projects whose cash flows are not influenced by one another?
- 3.If a project's cash inflows are lower than the initial investment discounted at the required rate of return, what will be the net present value?
- 4.If the present value of expected future cash inflows is $4150 and the initial investment is $1300, what is the profitability index?
- 5.Which type of numbers represent the cash inflows, or revenues, of a project?
- 6.If the initial investment is $6,000 and the profitability index is 5.6, what is the present value of the expected cash inflows?
- 7.Which concept leads to challenges such as a rising marginal cost of capital and the need for capital rationing?
- 8.Which capital budgeting approach relies on discounted cash flow analysis?
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