Question

What is the difference between screening and preference decisions?

Which budgeting method requires the user to impute the appropriate rate of interest?

Answer 1

Ans. : Capital Budgeting decision falls into two broad categories that is screening and preference decision.

* Screening decisions relate to whether a proposed project meets some preset standard of acceptance.

For example, a firm may have a policy of accepting projects only if they promise a retune of, say, 20% on the investment. The required rate of return is the minimum rate of return a project must yield to be acceptable.

Preference decisions relate to selecting from among several competing courses of action.

For example, a firm may be considering several different machines to replace an existing machine on the assembly line. The choice of which machine to purchase is a preference decisions.

* Preference decision method requires the user to impute the appropriate rate of interest.