Answer to Question #272545 in Management for Zeinab

Question

Capital budgeting is a method of estimating the financial viability of a capital investment over the life of the investment. A small company is considering whether to purchase a new delivery or to hire a delivery service. Required:

1.     Critically discuss the purpose of capital budgeting. (70 words)

2.     Elaborate on the four steps to follow when making a decision about a major purchase or project. (60 words)

3.     Discuss the two primary types of benefits to consider when evaluating a major purchase or project. (20 words)

4.     In case an SME decided to purchase a new delivery truck, identify two primary benefits associated with the purchase. Elaborate on the qualitative non-tangible benefits

Answer 1

1.      Capital budgeting main purpose in companies and in businesses is evaluating major investments and projects.

2.      Identifying the problem that is currently existing.

Searching for products or services that can resolve the problem.

Evaluating among the various alternatives to the products or services to solve the problem.

Selecting one alternative.

Evaluating the selection chosen.

3.      Capital required:- You must consider the initial investment.

Opportunity cost:- What would be the gains that you would lose should you have settled on another project.

4.      Ease of transportation.

Less repairs and maintenance cost.