Certified Management Accountant Practice Exam 2025 — Comprehensive Test Prep

Question: 1 / 430

In capital budgeting, what does 'financing' involve?

Assessing project viability

Establishing cash flow projections

Determining how the investment will be funded

In capital budgeting, 'financing' specifically refers to determining how the investment will be funded. This involves evaluating the sources of capital that will be used to finance the project, such as debt, equity, or a combination of both. Understanding the financing aspect is crucial because it affects the cost of capital, which impacts the overall profitability and viability of the project.

Choosing the appropriate financing options can have significant ramifications for the company's balance sheet, cash flow, and overall risk profile. For example, using too much debt can increase financial leverage and risk, while relying solely on equity might dilute ownership. Thus, a thorough analysis of financing options is essential for effective capital budgeting decisions, helping ensure that projects are not only viable in terms of operating performance but also sustainable in light of funding strategies.

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Monitoring project progress

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