Question

imagine you are the consultant who has to make the recommendation on whether or not to purchase Anheuser-Busch. Determine the rate of return you could expect from your investment and the method you would use to evaluate the investment decision. Assess the disadvantages and advantages of each investment method located in Chapter 4,(net present value, IRR, capital budgeting by payback, and account rate of return) and choose the one that would provide the most accurate measure for your anticipated rate of return requirement. Justify your recommendation.

Answer 1

NPV:  The final advantages are that the NPV method takes into consideration the cost of capital and the risk inherent in making projections about the future. In general, a projection of cash flows 10 years into the future is inherently less certain than cash flows projected next year. Cash flows that are projected further in the future have less impact on the net present value than more predictable cash flows that happen in earlier periods.and biggest disadvantage to the net present value method is that it requires some guesswork about the firm's cost of capital