Question

1) Capital budgeting is the process of analyzing potential projects. What does net present value (NPV) represent in capital budgeting analysis? How does NPV compare to internal rate of return (IRR); specifically, what makes them similar and different? What functional flaw exists in the discounted payback period calculation that makes this capital budgeting tool suspect?

Answer #1

favorable project whereas NPV < 0 represents a project that
should be rejected. The discount rate is the projects return

IRR is the rate at which NPV = 0 . For mutually exclusive projects
both give the same result however for independent projects NPV is
better than IRR

? Functional flaw in the discounted payback period calculation is
the cash flows after payback period is not considered and may lead
to rejection of project of higher NPV whose cash flows increase
after the payback period.

Best of luck for the future. Please rate well

How does the use of payback period, net present value, and
internal rate of return for capital budgeting projects connect
directly with a firm’s strategic goals?
What factors in the political, business, and economic climate
or environment have a direct correlation to capital budgeting
projects? What potential short-term and long-term impact on capital
budgeting projects might these factors have?

11-1 How are project classifications used in the capital
budgeting process?
11-2 What are three potential flaws with the regular payback
method? Does the discounted payback method correct all three flaws?
Explain.
11-3 Why is the NPV of a relatively long-term project (one for
which a high percentage of its cash flows occurs in the distant
future) more sensitive to changes in the WACC than that of a
short-term project?
11-4 What is a mutually exclusive project? How should managers...

Which of the following best explains why the net present value
method of capital budgeting is preferred over the internal
rate−of−return method?
.
the net present value method is expressed as a percentage of
initial investment
B.
the calculation under the net present value method is easy as it
does not use time value of money
C.
the percentage return computed under the net present value
method is very easy to compare
D.
the net present values of individual projects...

Capital Budgeting Decision Criteria: NPV
NPV
The net present value (NPV) method estimates how much a
potential project will contribute to -Select-business
ethicsshareholders' wealthemployee benefitsCorrect 1 of Item 1, and
it is the best selection criterion. The
-Select-smallerlargerCorrect 2 of Item 1 the NPV, the more value
the project adds; and added value means a
-Select-higherlowerCorrect 3 of Item 1 stock price. In equation
form, the NPV is defined as:
CFt is the expected cash flow in Period t, r...

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

If mutually exclusive projects with normal cash flows are being
analyzed, the net present value (NPV) and internal rate of return
(IRR) methods agree.
Projects Y and Z are mutually exclusive projects. Their cash
flows and NPV profiles are shown as follows.
Year
Project Y
Project Z
0
–$1,500
–$1,500
1
$200
$900
2
$400
$600
3
$600
$300
4
$1,000
$200
If the weighted average cost of capital (WACC) for each project
is 14%, do the NPV and...

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...

When analyzing the purchase of a capital asset, the Net Present
Value was equal to $500, but the Internal Rate of Return and the
Payback Period were both below preferred levels. How should you
proceed?
Decline the opportunity, because in business, nothing is worth
doing for only $500.
Accept the opportunity because the NPV is above zero.
Decline the opportunity since two of the three analysis conclude
you should decline.
Do not act on this. Wait for some time to...

When applying the concept of present value to capital budgeting
decisions, which of the following statements is TRUE?
Question 28 options:
Internal rate of return cannot be computed when cash flows are
unequal year to year
A project with a higher IRR will be preferable over one with a
lower IRR.
A positive NPV means that a project earns less than the cost of
capital on a project.
Residual value is not included in the calculation of Net Present
Value.

Understanding the IRR and NPV
The net present value (NPV) and internal rate of return (IRR)
methods of investment analysis are interrelated and are sometimes
used together to make capital budgeting decisions.
Consider the case of Blue Hamster Manufacturing Inc.:
Last Tuesday, Blue Hamster Manufacturing Inc. lost a portion of
its planning and financial data when both its main and its backup
servers crashed. The company’s CFO remembers that the internal rate
of return (IRR) of Project Delta is 11.3%,...

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