Questions 8 and 9

Why is capital budgeting an important process in the firm value-maximizing process of firms? What is the decision rule for the net present value technique? Briefly explain them. What is the decision rule for the internal rate of return technique? Briefly explain them. What are the strength and weaknesses of each of the capital budgeting techniques? What is a net present value profile? What is its relationship to the internal rate of return? What are conventional cash flows? Explain why the internal rate of return technique should not be used with unconventional cash flows. Which techniques should be used instead? Given a list of projects and their respective net present values, how should these projects be evaluated if they are not mutually exclusive? How does that change if the projects are mutually exclusive? When is the Equivalent Annual Annuity technique to be used? What is the Replacement Chain Technique of capital? When should it be used? Briefly explain the similarities and differences between the EAA and the Replacement chain? Explain when the modified internal rate of return should be used as a capital budgeting technique