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What are the negative consequences of inaccurately solving a capital budgeting problem?

What are the negative consequences of inaccurately solving a capital budgeting problem?

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Answer #1

A capital budgeting problem rises when inaccurately forming the assumptions for capital decision making criteria for investments. There are number of negative consequences for such inaccuracy

a)

The investment can be either undervalued or overvalued, thus destroying value for shareholders

b)

The debt holders may get a rosy picture thus unable to receive their cash flows

c)

Wrong investment can lock money in inefficient projects thus denying the company resources to invest in value adding projects.

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