Question

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.

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

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

The discounted payback period improves on the regular payback period by accounting for the time value of money.

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

Answer 1

The following statements are true while making Capital Budgeting Decisions:

For most firms, the reinvestment rate assumption in the NPV is more realistic than the assumption in the IRR Because IRR is based on the assumption that cash flows are reinvested at the IRR but NPV is based on the assumption that the cash flows are reinvested at the cost of capital. Therefore NPV is more realistic than the IRR.

The discounted payback period improves on the regular payback period by accounting for the time value of money beause Regular pay back period method, doesnot takes into account the concept of time value of money But discounted pay back period,takes into account the time value of money.

NPV is the single best method to use when making capital budgeting decisions.as NPV is considered as one of the most common method which lead to good investment decisions in capital budgeting .