a. What is capital budgeting?
During planning, companies also budget capital expenditures. Capital Budgeting come to the fore here. Capital budgeting is a process by which the company decides which long term investments to make, as these investments generate cash-flows over several years. Deciding to accept or reject a capital budgeting totally relies on the cash flow analysis churned out by cost invested to cash flows generated. New machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing after analysis by capital budgeting. Capital budgeting use the incremental cash flows from each potential investment, or project. Techniques such as the accounting rate of return, and "return on investment are used. Simplified and hybrid methods can also be used, such as payback period and discounted payback period.
b. What is the difference between independent and mutually exclusive projects?
Capital budgeting is classified into Independent Projects or Mutually Exclusive Projects. Independent projects are stand alone projects while mutually exclusive projects are a group of projects aligned together for consideration. For example, a set of projects, which are to accomplish the same task. Thus, when choosing between "Mutually Exclusive Projects" more than one project may satisfy the Capital Budgeting criterion. However, only one, i.e., the best project can be accepted.
Mutually exclusive is the situation in which only one of two projects designed for the same purpose can be accepted while Independent projects is a project whose feasibility can be assessed without consideration of any others. In mutually exclusive projects if the cash flows of one are adversely affected then, these can adversely impact the acceptance of the other while in independent projects the cash flows of one are unaffected by the acceptance of the other.
(1) What is the payback period? Find the paybacks for franchise L & S?