1. What conceptual advantages does the discounted payback method have over the regular payback method? Can the discounted payback ever be longer than the regular payback? Explain.

2. Describe how the IRR is calculated, and describe the information this measure provides about a sequence of cash flows. What is the IRR criterion decision rule?

3. Why is NPV considered a superior method of evaluating the cash flows from a project? Suppose the NPV for a projects cash flows is computed to be $2,500. What does this number represent to the firms shareholders?

4. Are the capital budgeting criteria we discussed applicable to not-for-profit organizations? How should such entities make capital budgeting decisions? What about the U.S. government? Should it evaluate spending proposals using these techniques?

6. Given the choice, would a firm prefer to use MACRS depreciation or straight-line depreciation? Why?

7. In our capital budgeting examples, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?

8. Suppose a financial manager is quoted as saying, Our firm uses the stand-alone principle. Because we treat projects like minifirms in our evaluation process, we include financing costs because they are relevant at the firm level. Critically evaluate this statement.