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Home Grades Personalized Reviews Discussion Course Materials Capital Budgeting -Decision Criteria and Real Option Considerations Graded Assignment | Read Chapter 10 | Back to Assignment Due Saturday 12.02.17 at 11:45 PM Attempts: 8. Comparison of alternative decision criteria There are four principal decision models for evaluating and selecting investment projects: Keep the Highest: /4 Aa Aa - Net present value (NPV) . Profitability index (PI) . Internal rate of return (IRR) Payback period (PB) Which method recognizes the real option aspects of a proposed capital investment? O IRR O None of the methods (NPV, IRR, PI, PB, or discounted PB) recognizes the real option aspects of a capital investment O NPV and PI O IRR and P Read the following statements and categorize whether they characterize the IRR, NPV, PB, or PI decision criteria: Statement IRR NPV PB PI Crit

Explanation / Answer

IRR assumes that cashflows are invested at IRR rate,Where as NPV method assumes that cashflows are reinvested at cost of capital.
Reinvestment of cost of capital is more practical.
So,NPV is considered as best technique of evaluation compared to IRR.

None of the method(NPV,IRR,PI,PB,or Discounted PB) gives real option for proposing investment ,eventhough NPV looks like Real option it cannot be considered as real option.

PVNCF-NINV=NPV
If the IRR Value is less than the firms cost of capital then the Project should be rejected.
PB value is expressed in terms of Years.

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