Question

With respect to the capital budgeting practices of large U. S. corporations: Answer A the profitability...

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

Homework Answers

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.

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