Before making capital budgeting decisions, finance professionals often generate,

Question

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? Checkfaiïjthat apply. Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/reject decision for mutually exclusive projects. The discounted payback period improves on the regular payback period by accounting for the time value of money. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. is the single best method to use when making capital budgeting decisions.

Explanation / Answer

1. Because the NPV and MIRR use the same reinvestment rate they always lead to same accept /reject criteria for mutually exclusive projects: This statement is not correct as in case of mutually exclusive projects with different scales, the MIRR and the NPV may conflict.

2. The discounted payback peroid improves on the regular payback period by incorporating the time value of money: The statement is correct.

3.For most firms the reinvestment rate assumption in the MIRR is more realistic than assumptions in the IRR. The statement is correct as the reinvestment rate in MIRR is the cost of capital which is more realistic for most of the firms.

B . NPV is the best Method to use when making Capital Budgeting decisions.

Reason is the more realistic reinvestment rate of cost of capital than IRR and it shows the net amount of return to the shareholders in absolute term.

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