Glencoe Entrepreneurship Finance Practice Exam

Define capital budgeting and name one common method.

Capital budgeting is the process of evaluating long-term investments; method: net present value (NPV). Capital budgeting is used to forecast monthly cash receipts. Capital budgeting deals with short-term liquidity management. Capital budgeting involves setting prices for products.

Correct Answer:

Capital budgeting is the process of evaluating long-term investments; method: net present value (NPV).

Explanation:

Capital budgeting focuses on evaluating and selecting long-term investments whose benefits span multiple years. A common method used in this process is net present value, which estimates the value created by a project by discounting its expected future cash flows back to today and subtracting the initial cost; a positive NPV means the project is expected to add value. The other activities described—forecasting monthly cash receipts, managing short-term liquidity, and setting prices—belong to cash flow forecasting, liquidity management, and pricing decisions, respectively, and are not capital budgeting.

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