Discuss the following statement: If a firm has only independent projects, a constant WACC, and projects with normal cash flows, the NPV and IRR methods will always lead to identical capital budgeting decisions. What does this imply about the choice between IRR and NPV? If each of the assumptions were changed (one by one), how would your answer change?

Discuss the following statement: If a firm has only independent projects, a constant WACC, and projects with normal cash flows, the NPV and IRR methods will always lead to identical capital budgeting decisions. What does this imply about the choice between IRR and NPV? If each of the assumptions were changed (one by one), how would your answer change?

Name: H5. Discuss the following statement: If a firm has only independent pr
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Description: H5. Discuss the following statement: If a firm has only independent projects, a constant WACC, and projects with normal cash flows, the NPV and IRR methods will always lead to identical capital budgeting decisions. What does this imply about the choi

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 11P

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If a firm has only independent projects, a constant WACC, and projects with normal cash flows, the NPV and IRR methods always lead to identical capital budgeting decisions. What does this imply about the choice between IRR and NPV? If each of the assumptions were changed (one by one), how would your answer change?
1. In the context of capital budgeting, what is an opportunity cost?2. Given the choice, would a firm prefer to use MACRS depreciation or straight-line depreciation? Why?3. In our capital budgeting examples, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?4. Suppose a financial manager is quoted as saying, “Our firm uses the stand-alone principle. Because we treat projects like minifirms in our evaluation process, we include financing costs because they are relevant at the firm level.” Critically evaluate this statement.
1. Why is the NPV considered to be theoretically superior to all other capital budgeting techniques?Reconcile this result with the prevalence of the use of IRR in practice. How would you respond toyour CFO if she instructed you to use the IRR technique to make capital budgeting decisions onprojects with cash flow streams that alternate between inflows and outflows?
Discuss the following statement: If a firm has only independent projects, a constant WACC,and projects with normal cash flows, the NPV and IRR methods will always lead to identicalcapital budgeting decisions. What does this imply about the choice between IRR and NPV?If each of the assumptions were changed (one by one), how would your answer change?
For capital budgeting projects like the one depicted in the prior problem, which of the following statements is CORRECT? (Ch. 11) Group of answer choices The lower the required rate of return, the lower the calculated NPV. If a project’s NPV is less than zero, then its IRR must be less than the required rate of return. Generally speaking, risky projects should have very low required rates of return. A relatively high required rate of return should be used to find the NPV of a relatively low risk project. If a project’s NPV is greater than zero, then its IRR must be less than zero.
Suppose a firm uses the WACC as the single hurdle rate in determining the value of capital budgeting projects rather than using risk adjusted hurdle rates. Choose the statement that actually completes the sentence describing the possible outcomes for the firm: the firm will tend to Accept profitable, low risk projects and reject unprofitable, high risk projects Accept profitable, low risk projects and accept unprofitable, high risk projects Reject profitable, low risk projects and reject unprofitable high risk projects Become less risky overtime Reject profitable, low risk projects and accept unprofitable, high risk projects
al What is the ditterence between NPV and IRR? Which is the best method corporate companies adapt for capital budgeting of their Projects. If the Discounted Rate of return is Zero what is the value of IRR?( High/low).
All parts are under 1 questions, therefore per your policy all parts can be answered. 6. The payback period The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Blue Hamster Manufacturing Inc.: Blue Hamster Manufacturing Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Delta’s expected future cash flows. To answer this question, Blue Hamster’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. A. Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in…
With everything else held constant, which of the following events should increase the internal rate of return of a capital budgeting project? A. An increase in the cost of the asset. B. A decrease in the firm’s cost of capital. C. A decrease in the cost of operating the asset. D. A decrease in tax benefits.
1: What is the Decision-making Criteria in Capital Budgeting? 2.Write Notes on the Following: Goldratt’s Critical Chain Pseudo activities
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. The discounted payback period improves on the regular payback period by accounting for the time value of money. For most firms, the reinvestment rate assumption in the NPV is more realistic than the assumption in the IRR. Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/reject decision for mutually exclusive projects. True or False: Sophisticated firms use only the NPV method in capital budgeting decisions.
1- What are the payback and discounted payback methods? What are their main weaknesses? 2- What are the five stages of capital budgeting? 3- What are strengths and weaknesses of the accrual accounting rate-of-return (AARR) method for evaluating long-term projects? 4- What are the relevant cash inflows and outflows for capital budgeting decisions? 5- What strategic considerations arise in the capital budgeting process?