Question

With respect to the capital budgeting practices of large U. S.
corporations: Answer A the profitability index has been gaining in
popularity. B IRR and NPV have been gaining in popularity. C.
payback and discounted payback have been gaining in popularity. D.
IRR and NPV have declined in popularity

Answer #1

Answer - B) IRR and NPV have been gaining in popularity.

The project's IRR is the actual rate of return earned by the investment. It is the rate where the projects NPV equals 0.

NPV is the net present value of the project given the company's required rate of return. Thus projects with positive NPV are selected as they earn more than the return required by the company.

These 2 measures are utmost important in capital budgeting decisions and are gaining in poularity for large US corporations.

Profitability index is used by companies facing limited capital and where projects are mutually exclusive. Its used in capital rationing decisions.

Payback and discounted payback period may be used by small companies for their decisions. These measures have limitations and must not be used for making big decisions.

which of the following capital budgeting rules does not use the
time value of money concept?
a) NPV
b) IRR
c) the discounted payback period
d) the profitability index
E) the payback period
Please explain why
Thank you

Which of the following statements is INCORRECT regarding
capital budgeting tools?
If the NPV is positive, the Profitability Index must be greater
than 1.
If the IRR is greater than the required return, then the NPV
will be positive.
The discounted payback period will always be smaller than the
payback period.
The NPV is the best capital budgeting tool, as a general
rule.

1. Under conditions of capital rationing (i.e., limited capital
funds are available), the optimal allocation of funds to capital
investment projects occurs when management uses which one of the
following decision models?
a. Internal Rate of Return (IRR)
b. Discounted accounting rate of return
c. Profitability Index (PI)
d. Discounted Payback (WRONG ANSWER)
e. Modified Internal Rate of Return (MIRR).
2. The payback period for evaluating capital investment projects
emphasizes:
a. Average net income divided by average investment
b. Average...

Consider the capital budgeting decision to be made with the
following data about 2 competing projects. Project A has an NPV of
$12 500, and IRR of 10% and a payback period of 3 years. Project B
has an NPV of $12 000, but an IRR of 13% and a payback period of 2
years 10 months. Which project(s) would be chosen on an independent
basis?
Select one:
a. Project A and Project B
b. Neither Project A nor Project...

Consider the capital budgeting decision to be made with the
following data about 2 competing projects. Project A has an NPV of
$12 500, and IRR of 10% and a payback period of 3 years. Project B
has an NPV of $12 000, but an IRR of 13% and a payback period of 2
years 10 months. Which project(s) would be chosen on an independent
basis?
Select one:
a. Project B
b. Neither Project A nor Project B
c. Project...

You are a financial analyst for Hittle Company. The director of
capital budgeting has asked you to analyze two proposed capital
investments, Projects X and Y. Each project has a cost of $10,000,
and the cost of capital for each project is 10 percent. The payback
cutoff period is 3 years. The projects’ expected net cash flows are
as follows:
Expected Net Cash Flows
Year
Project X
0 ($10,000)
1 6,500
2 3,000
3 3,000
4 1,000
Project Y
($10,000)...

A.TRUE FASLSE
1) 1. Capital Budgeting do not involve the allocation of funds
to project that have longer life duration.
YES OR NO
2)Long time period decision of capital budgeting is good or bad
?
3)DPB is the Discounting technique of Capital Budgeting
YES OR NO
4)If a project has outlay of Rs. 40000 and yields annual cash
inflow of Rs. 8000 for next 10 years. What is the Discounted
Payback period of the project if rate of interest is...

7. Which of the following is correct with respect to working
capital and capital budgeting?
a. Investment in working capital is ignored in the capital
budgeting process
b. Working capital usually has a different discount rate
c. Investment in working capital is assumed to be recovered at
the end of the life of the project
d. All of the above are correct

The profitability index (PI) is a capital budgeting tool that is
defined as the present value of a project’s cash inflows divided by
the absolute value of its initial cash outflow. Consider this
case:
Free Spirit Industries Inc. is considering investing $2,500,000
in a project that is expected to generate the following net cash
flows:
Year
Cash Flow
Year 1
$325,000
Year 2
$425,000
Year 3
$450,000
Year 4
$425,000
Free Spirit Industries Inc. uses a WACC of 7% when...

12. Conclusions about capital budgeting
The decision process
Before making capital budgeting decisions, finance professionals
often generate, review, analyze, select, and implement long-term
investment proposals that meet firm-specific criteria and are
consistent with the firm 's strategic goals.
Companies often use several methods to evaluate the project's
cash flows and each of them has its benefits and disadvantages.
Based on your understanding of the capital budgeting evaluation
methods, which of the following conclusions about capital budgeting
are valid? Check all...

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