The decision process Before making capital budgeting decisions, finance professi

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. J O For most firms, the reinvestment rate assumption in the MIRR 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. IRR NPV

Explanation / Answer

the following statements are true:

A.FOr most firms, the reninvestment rate assumption in the MIRR is more realistic that the assumption in the IRR.

C DIscounted payback period improves on the regular payback period by accounting for the time value of money.

(note: IRR assumes the reinvestment at IRR rate, MIRR assumes the reinvestment at cost of capital rate).

(note: discounted payback period takes into account the time value of money, by considering discounted cash flows).

2nd question.

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

(this is because it considers all the cash flows unlike payback period)

(it does not assume that intermediate cash flows are reinvested at IRR rate)

(it assumes that intermediate cash flows are invested at cost of capital rate).

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