12. Conclusions about capital budgeting Aa Aa The decision process Before making
ID: 2782997 • Letter: 1
Question
12. Conclusions about capital budgeting Aa Aa 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 MIRR is more realistic than the assumption in the IRR. The NPV shows how much value the company is creating for its shareholders. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp True or False: Sophisticated firms use only the NPV method in capital budgeting decisions O True O FalseExplanation / Answer
The first statement is correct. IRR assumes reinvestment at the internal rate of return (IRR), while MIRR assumes reinvestment at the discount rate.
The second statement is also correct.
The last statement is incorrect. IRR has been a very popular method to compute returns.
False. Most sophisticated firms use NPV as it highlights the value addition. But that doesn't mean they don't use IRR, MIRR or payback method at all.
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