1. You have been asked to make a short presentation at your company’s annual cap
ID: 2719640 • Letter: 1
Question
1. You have been asked to make a short presentation at your company’s annual capital budget meeting to present an analysis of the strengths and weaknesses of the following capital budgeting selection methodologies: NPV, payback, IRR. Describe how you would respond to this request at the meeting.
2. The senior executives were impressed with your presentation on capital budgeting methodologies. They have asked you to present a follow up discussion regarding the company’s weighted average cost of capital (WACC). Specifically, they want to know how it is calculated and, most importantly, how it should be used. Discuss your responses.
Explanation / Answer
NPV:
Strength: It is a mesure of dollar contribution of dollars to stockholders
Weakness: Calculation is done on the basis of projections.
Payback period:
Strength: It shows in how many years, incurred cost will get
Weakness: It is also based on projections
IRR:
Strength: It shows the return on the original money invested.
Weakness: It can give you conflicting answers when compared to NPV.
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