Question

In capital budgeting, which of the measures should be larger than one and accept it?

NPV |
||

IRR |
||

MIRR |
||

PI |

Answer #1

A
positive **NPV** means that the sum of present
value of future cash flow is greater than the cash outflow. This
implies that the project is profitable and hence acceptable. A
negative **NPV** means that the sum of present value
of future cash flow is less than the cash outflow. Thus

If the
IRR of a project is greater than or equal to the project's
**cost** of capital, accept the project. However, if
the IRR is less than the project's **cost** of
capital, reject the project.

According to MIRR, The project should be accepted if the modified internal rate of return is greater than the cost of capital.

Profitability index, also known as profit investment ratio and value investment ratio, is the ratio of payoff to investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment. Thus whenever the PI is greater than 1, select the project otherwise reject it.

Thus, PI method the project is slected if the PI is greater than 1.

**ANS:
PI**

In capital budgeting, which of the measures should be larger
than one and accept it?
NPV
IRR
MIRR
PI
2)
An investment project has the following cash flows: CF0 =
-1,200,000; C01 – C05 = 300,000 each
If the required rate of return is 12%, please calculate PI pf
the project.
a. 0.51
b. 0.88
c. 0.90
d. 0.99
e. 1.05
f. 1.07
g. 1.11

Which of the following statements about capital budgeting
decision methods is most correct?
NPV is superior since it is the most conceptually correct
method.
IRR is superior since it measures the rate of return on a
capital investment.
PI is superior since it measures the present value benefit per
dollar of capital invested.
PB is superior since it is quick and easy to use and
understand.
None of the three methods is considered superior to the
others.

In taking capital budgeting decisions, financial
managers are advised to use more than one capital budgeting
technique for consistency, reliability and accuracy in capital
budget decisions. Although the Net Present Value (NPV) capital
budgeting technique is required in most capital budgeting
discussion processes, it may sometimes have conflicting decision
with Internal Rate of Return (IRR) under certain conditions.
Briefly state the conditions under which NPV and IRR results in
conflicting decisions and how the financial manager can resolve
this conflict?

) Which if the statements below describes the correct capital
budgeting decision rule? a) Reject a project if the cost of capital
exceeds the IRR. B) Reject a project if the cost of capital is less
that the NPV. C) Accept a project if the NPV is greater than the
IRR. D) Accept a project if the cost of capital is greater that the
NPV.

Which of the following statements is INCORRECT regarding
capital budgeting tools?
If the NPV is positive, the Profitability Index must be greater
than 1.
If the IRR is greater than the required return, then the NPV
will be positive.
The discounted payback period will always be smaller than the
payback period.
The NPV is the best capital budgeting tool, as a general
rule.

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...

Discuss the notions of conventional and nonconventional cash
flows in capital budgeting. Which investment evaluation criteria
would you use for unconventional cash flows and why? Provide a
fictitious unconventional cash flow example and apply the payback
period, NPV, IRR, MIRR, and PI methods to your example. Interpret
the results.

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...

Rank the following capital budgeting techniques in order of
importance: Payback, Discounted Payback, IRR, NPV and MIRR. Why
does this order make sense?

The NPV decision rule says to accept the project if the NPV is
greater than zero. You perform a thorough capital budgeting
analysis on a project that requires a $1,000,000,000 initial
investment and calculate the net present value (NPV) as $1.
Following the rule, you tell your boss she should accept the
project. She laughs and says “do you think I would really invest
$1,000,000,000 for a measly $1 NPV? You should be fired” How would
you respond to her?

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