1) Payback and rate of return are financial tools used in capital budgeting to decide the viability of investments over a period of time. In this context, respond to the following:

A) What are the major criticisms of the payback and simple rate of return methods? In what situations are these financial tools useful?

B) Choose a particular type of industry and explain why it would benefit from the use of simple rate of return for budgeting decisions.

2) Cost of capital is the rate of return that the equity and debt holders demand against the funds they have supplied to the company. It is the minimum return that a company must earn on its existing asset base to satisfy creditors, owners, and other providers of finance. Consider the aspects of cost of capital and respond to the following:

A) How does the cost of capital serve as a screening tool when using the net present value (npv) method?

B) How does the cost of capital serve as a screening tool when using the internal rate of return (irr) method?

Answer rating: 100% (QA)

Payback and Cost of Capital Payback and rate of returns are financial tools used in capital budgeting to determine viability of investment over a period of time However these tools have limitations as ... View the full answer