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Written Assignment - Differences in Capital Budgeting Alternatives Capital budgeting is a process where a firm looks at a set of cash flows from a

Written Assignment - Differences in Capital Budgeting Alternatives

Capital budgeting is a process where a firm looks at a set of cash flows from a project over the years to determine whether to accept or reject a project. It is called Capital Budgeting since these projects are capital investments- investments with a useful life of over one year and are significant obligations to the firm.

While there are a variety of methods to perform this analysis, the main techniques are:

  • Payback
  • Net Present Value
  • Internal Rate of return.

For each:

  1. Describe each method's advantages and disadvantages from the company's standpoint as they seek to decide whether to accept a project or reject a new capital budgeting project.
  2. Describe the effect on each method, in general, if the interest rate a firm pays increases from 2% to 4%.

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