Question

Capital budgeting emphasizes the key role management has in value creation by taking projects and expanding the size of the firm if profitable.

Do you agree or disagree with this statement? Why or why not?

Answer 1

Yes, CB is essential because it helps to determine the profitability of a proposed project over a defined time period and emphasizes on the key role management has in value creation by taking projects and expanding the size of the firm if profitable. For this purpose economic techniques are devised to ascertain the present value of the future investment and the length of time a project needs before its maturity. The initial economic method for evaluating a project is the use of net present value (NPV), as it indicates whether an investment is worth proceeding or not. If the NPV is a positive value then the project should go ahead and vice-versa.