Question

9. 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.

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

For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR.

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

True or False: Sophisticated firms use only the NPV method in capital budgeting decisions.

False

True

Answer 1

Answer to 1st Question

Correct Statements

For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR.

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

The NPV=PV of inflows-Initial outflow .It thus shows the positive value that's added to the firm by a particular project

The reinvestment rate used by MIRR is the cost of capital,so its the more realistic assumption

Second Question

Answer:False

Even though the NPV is the most preferred method especially when it comes to mutually exclusive projects,firms use other capital budgeting techniques too.So this statement is false.