8. Conclusions about capital budgeting

The decision process

Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firms strategic goals.

Companies often use several methods to evaluate the projects cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply.

The discounted payback period improves on the regular payback period by accounting for the time value of money.

For most firms, the reinvestment rate assumption in the NPV is more realistic than the assumption in the IRR.

Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp.

True or False: Sophisticated firms use only the NPV method in capital budgeting decisions.

True

False