17. You have conducted a capital budgeting analysis of projects A, B and C with

Question

17. You have conducted a capital budgeting analysis of projects A, B and C with the following results: NPV IRR Payback A 200,000 8.7% 4 years B -100,000 5.6% 3 years C 300,000 9.8% 5 years If r=7% and the company has set the payback cutoff at 3 years, which is false? (a) Each project is acceptable under at least one method (b) The IRR and NPV would lead to different acceptance decisions on at least one project (c) The payback period focuses on speed of payback instead of the best financial decision (d) Based on best practices for capital budgeting discussed in class, A and C should be accepted

why A is true and B is false??

Explanation / Answer

Statement b is false . NPV and IRR or both projects A & C leads to acceptance decision and Project B for rejection decion based on negative NPV and IRR lower than cost of capital 7%. So IRR & NPV does not lead to different acceptance decisions on any project.

Statement a. is true as each projcet is acceptable by atleast one criteria;

Project A accpetable by NPV & IRR

Project B acceptable by Payback

Project C acceptable by NPV & IRR.

Statement c is true as payback only focuses on speed of payback not on total cash flow.

Statemenr d is correct as based on more reliable NPV and IRR parameters project A & C shpuld be acceted.

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