1. Describe the capital budgeting process in your own words.

1. Describe the capital budgeting process in your own words.
2. Define capital investment. List at least three examples of capital investments other than the examples provided in the chapter.
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. Summarize the net present value method for evaluating a capital investment opportunity. Describe the circumstances that create a positive net present value. Describe the circum-stances 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. 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. 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. The net present value method assumes that future cash inflows are immediately rein-vested 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. 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. List and describe the advantages and disadvantages of the internal rate of return method.
10. List and describe the advantages and disadvantages of the payback method.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment...
Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the...

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