11. Conclusions about capital budgeting Aa Aa The decision process Before making
ID: 2383475 • Letter: 1
Question
11. 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. is the single best method to use when making capital budgeting decisions IRR 5Explanation / Answer
1st statement - Correct. While IRR assumes that each cash flow during project life is reinvestment at the IRR only, MIRR overcomes this weakness & is more realistic.
2nd statement - correct. NPV gives an absolute dollar value as net present value of cash inflows over outflows, thus showing the value generation for the firm.
3rd statement - Incorrect. IRR is widely accepted by managers since they can quickly grasp & relate to the percentage return concept.
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