What factors account for the popularity of the pay-back method? In what situations is it often used as the primary decision- making technique? Why?
Answer to relevant QuestionsDescribe how the IRR and NPV approaches are related. When a firm is faced with capital rationing, how can the profitability index (PI) be used to select the best projects? Why does choosing the projects with the highest PI not always lead to the best decision? What is meant by potential investments relevant cash flows? What are sunk costs and cannibalization, and do they affect the process of determining proposed investments incremental cash flows? For a firm considering expansion of its existing line of business, why is the WACC, rather than the cost of equity, the preferred discount rate if the firm has both debt and equity in its capital structure? What are financial intermediaries, and what role do these firms play in providing long- term capital to publicly traded U. S. nonfinancial corporations?
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