8. Conclusions about capital budgeting Aa Aa The decision process Before making

Question

8. 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. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp The NPV shows how much value the company is creating for its shareholders. is the single best method to use when making capital budgeting decisions. NPV IRR

Explanation / Answer

The first statement is correct. MIRR is based on the reinvestment option, which is more realistic for firms, while IRR assumes IRR as reinvestment rate which isn't practical.

The second statement is incorrect. IRR is widely used because rate of returns are easy to grasp.

The third statement is correct. NPV is the value addition for shareholders.

NPV is the single best method.

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