Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, andimplement long-term investment proposals that meet firm-specific criteria and are consistent with the firm's strategicgoalsCompanies often use several methods to evaluate the project's cash flows and each of them has its benefits anddisadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the followingconclusions 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 ofmoneyFor most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in theIRR.Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them tograspis the single best method to use when making capital budgeting decisions.

Option 1 and 2 are correct.Correct options:The discounted payback period improves on the regular…

Answered: Before making capital budgeting…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Which of the following statements is FALSE? A. When evaluating a capital budgeting decision, we generally include interest expense. B. Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. C. Many projects use a resource that the company already owns. O D. As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.
In the textbook's capital budgeting examples, the book assumes that the firm recovers all of its working capital invested into a project. In the real world, is this a reasonable assumption? Justify your position and discuss when it would
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. The NPV shows how much value the company is creating for its shareholders. 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. is the single best method to use when making capital budgeting decisions.
Please describe NPV, IRR and their relationship. How do you evaluate each for making an investment decision? That is, what is a favorable NPV and IRR for making an investment decision. If you were developing a capital budgeting process at your employer, how would you prioritize your projects? What is the NPV when IRR = WACC, IRR>WACC, and IRR<WACC? There is a duplex for sale in Absecon for $700,000 at this time. It has 2 units that generate a total of $25,000 in gross rent. The property taxes are $4,000, commercial property insurance is $2,000, flood insurance is $1,000, and annual maintenance is $2,000. You expect to sell it in one year at a price growth of 0%. What is the NPV with a WACC of 10%. Is the IRR greater or less than the WACC? Would you invest in this project and why?
When we use the term “capital budget,” we are referring to the list of projects that business might undertake during the next planning period. When analyzing whether a company should undertake a certain project, one of the most critical steps in analyzing a capital investment proposal is estimating the incremental cash flows for the project. This is important because there is financial risk involved when undertaking any new business venture. A variety of factors must be considered such as opportunity costs and sunk costs. Inflation must also be considered. The process of analyzing capital budget decisions requires a manager to consider many factors, as well as possibly even conducting a sensitivity analysis or a scenario analysis. By inputting different variables, the manager will be able to see the different outcomes which might occur. In the health care industry, these factors may include risk, profitability, the needs of both the medical staff and the patient population and how the…
I'm not sure if I am doing this correctly, also not sure which ones to choose for the last question.
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 NPV is more realistic than the assumption in the IRR. The discounted payback period improves on the regular payback period by accounting for the time value of money. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp.
In a few sentences, answer the following question as completely as you can. Compare discounted cash flow (DCF) and non-discounted cash flow capital budgeting techniques. If you were to evaluate a project, which one of these techniques would you use?
Firms use several techniques to estimate risk, see Chapter 8. After describing these techniques, explain how firms incorporate risk in the investment evaluation process. Give examples of alternative ways a firm can use to estimate the cost of equity, and by extension the Weighted-Average Cost of Capital (WACC or Kw). Be specific as to the reasons firms use multiple hurdle rates when considering different investment projects.
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

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