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. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. The discounted payback period improves on the regular payback period by accounting for the time value of money 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 False

Explanation / Answer

Answer )

Yes.For most FIrms MIRR is more realistic than IRR because IRR Assumes that reinvestment takes at the IRR itself whereas reinvestment generally occurs at cost of capital. Also MIRR also give unique results for unconventional cashflows whereas we get multiple IRRs for unconventional cashflows

Yes. Discounted payback period improves on the regular payback period results by taking into consideration time value money.

No. Infact managers prefer IRR as it gives percentage figure and it is easier for them to compare projects with different scales.

Answer) Yes. Sophisticated firms consider NPV in thier capital budgeting process.

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