5% MINDTAP Assignment 11- The Basics of Capital Budgeting Due on Dec 5 at 8 AM E

Question

5% MINDTAP Assignment 11- The Basics of Capital Budgeting Due on Dec 5 at 8 AM EST 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. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp G The NPV shows how much value the company is creating for its shareholders For most firms, the reinvestment rate assumption in the NPV is more realistic than the assumption in the IRR. NPV Type here to search

Explanation / Answer

Statement - 2 : When we have a positive NPV, we have earnings from the project in excess of what we had invested. Thus there is value addition to stockholders. So this is a valid statement

Statement - 3 : The exact reinvestment rate is not known in any case. So NPV assumes a minimum of cost of capital as reinvestment rate. This more realistic than IRR which assumes all cashflows are reinvested at IRR itself. So this is also a valid statement

NPV is the best method to use in capital budgeting.

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