Question

8. Conclusions about capital budgeting The decision process 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. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp. The discounted payback period improves on the regular payback period by accounting for the time value of money. True or False: Sophisticated firms use only the NPV method in capital budgeting decisions. O False O True

Answer 1

1.(A) MIRR reinvestment rate assumption will be more realistic than assumption in internal rate of return because internal rate of return will be using the same rate of reinvestment and it is not appropriate.

(C)discounted payback period will be improving on the normal payback period because it will be including the time value of money and it will be a better concept to rely upon.

2. The given statement is FALSE as sophisticated firm will be trying to include a lot of capital budgeting techniques including equivalent annuity method along with internal rate of return method with capital budgeting.