Question

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 that apply.

A) For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the

IRR.

B) The NPV shows how much value the company is creating for its shareholders.

C) Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/ reject decision for mutually exclusive projects.

NPV or IRR is the single best method to use when making capital budgeting decisions.

Answer 1

Answer is A & B

A) For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the

IRR.because in MIRR cash flows are invested a rate equal to cost of capital while in IRR cash inflows are invested at a rate equal to IRR.

B) The NPV shows how much value the company is creating for its shareholders.because it is the present value of investment over the cash outflow

NPV or IRR is the single best method to use when making capital budgeting decisions.

Answer - NPV is the single best method to use when making capital budgeting decisions