What important flaw do both the IRR and PI share? Explain.
Answer to relevant QuestionsWhy do managers focus on the effect that an investment will have on reported earnings rather than on the investments cash flow consequences? Erwin Enterprises has 10 million shares outstanding with a current market price of $10 per share. There is one investment available to Erwin, and its cash flows are provided below. Erwin has a cost of capital of 10 percent. ...What role does the human element play in the capital budgeting decision process? Could it cause a negative NPV project to be accepted? Use the language of real options to explain why riskier firms must pay higher interest rates when they borrow money. Give a real- world example of an expansion option and an abandonment option.
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