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Compare and contrast the four capital budgeting methods: a. What reinvestment rate assumptions are built into...

Compare and contrast the four capital budgeting methods:

a. What reinvestment rate assumptions are built into the NPV, IRR, and MIRR methods? And which assumption is more realistic? Explain.

b. What are the strengths and weaknesses of payback method, comparing to the other three methods?

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Answer #1

IN NPV reinvestment rate is WACC
IRR reinvestment rate is IRR and
MIRR reinvestment rate is WACC

Cost of capital as WACC is superior because WACC is less than IRR . Hence reinvestment lower rates is better and realistic.


Strengths of Payback Period
1. Easy to calculate and calculate and less time consuming

Weakness:
1. doesn’t consider cash flows after Payback period.
2. It does not include time value of money.

Assumptions in Payback Period:
It does not take into consideration the entire life of project or asset. It is different from other methods because it doesnot take into consideration time value of money and also doesnot take into consideration entire cash flows.

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