Study GuideAccounting Principles II–Capital BudgetingCapital Budgeting TechniquesCapital budgeting is the process companies use to decide whether to invest in long-term projects,such as new equipment, buildings, or technology. These projects usually involvelarge amounts ofmoney, so companies must be very careful when making these decisions.Because companies usually havelimited capital, each potential project is carefully evaluated using:•Quantitative analysis(numbers and calculations), and•Qualitative factors(such as risk, strategy, and future growth).Most capital budgeting decisions focus oncash inflows and cash outflows, not net income fromaccrual accounting. This is because cash flows show the actual movement of money.Some companies simplify cash flow calculations by addingnet income + depreciation andamortization. Others take a more detailed approach and separately estimate:•Cash inflows from customers•Cost savings•Proceeds from selling assets•Salvage value•Cash outflows for equipment, operating costs, interest, and repairsExample: The Cottage GangTheCottage Gang is considering purchasing new equipment for its boat rental business.Key details of the project:•Equipment cost:$150,000•Useful life:7 years•Salvage value:$5,000Preview Mode
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