CAPITAL BUDGETING CRITERIA Your division is considering two projects. Its WACC is 10%, and the projects after-tax cash flows (in millions of dollars) would be as follows:

0 1 2 3 4

Project A -$30 $5 $10 $15 $20

Project B -$30 $20 $10 $8 $6

i.

If the payback was the only method a firm used to accept or reject projects, what payback should it choose as the cutoff point, that is, reject projects if their paybacks are not below the chosen cutoff? Is your selected cutoff based on some economic criteria, or is it more or less arbitrary? Are the cutoff criteria equally arbitrary when firms use the NPV and/or the IRR as the criteria? Explain.

j. Define the MIRR. Whats the difference between the IRR and the MIRR, and which generally gives a better idea of the rate of return on the investment in a project? Explain.

k. Why do most academics and financial executives regard the NPV as being the single best criterion and better than the IRR? Why do companies still calculate IRRs?