Chapter 12, Problem 12.62ACT

Discussion Questions

1. 1. Describe the capital budgeting process in your own words.
2. 2. Define capital investment. List at least three examples of capital investments other than the examples provided in the chapter.
3. 3. “As the required rate of return increases, the net present value of a project also increases.’’ Explain why you agree or disagree with this statement.
4. 4. Summarize the net present value method for evaluating a capital investment opportunity. Describe the circumstances that create a positive net present value. Describe the circumstances that may cause the net present value of a project to be negative. Describe the advantages and disadvantages of the net present value method.
5. 5. Net cash inflows and net cash outflows are used in the net present value method and in the internal rate of return method. Explain why accounting net income is not used instead of cash flows.
6. 6. Suppose you are a manager and you have three potential capital investment projects from which to choose. Funds are limited, so you can only choose one of the three projects. Describe at least three methods you can use to select the one project in which to invest.
7. 7. The net present value method assumes that future cash inflows are immediately reinvested at the required rate of return, while the Internal rate of return method assumes that future cash Inflows are immediately invested at the internal rate of return rate. Which assumption is better? Explain your answer.
8. 8. The decision rule for NPV analysis states that the project with the highest NPV should be selected. Describe at least two situations when the project with the highest NPV may not necessarily be the best project to select.
9. 9. List and describe the advantages and disadvantages of the internal rate of return method.
10. 10. List and describe the advantages and disadvantages of the payback method.
11. 11. Oftentimes, investments in sustainability projects do not meet traditional investment selection criteria. Suppose you are a manager and have prepared a proposal to install solar panels to provide lighting for the office. The payback period for the project is longer than the company’s required payback period, and the project’s net present value is slightly negative. What arguments could you offer to the capital budgeting committee for accepting the solar energy project in spite of it not meeting the capital selection criteria?
12. 12. Think of a company with which you are familiar. What are some examples of possible sustainable investments that the company may be able to undertake? How might the company management justify these possible investments?