Capital Budgeting and Decision Making Please respond to the following: How is the NPV rule related...

Capital Budgeting and Decision Making

Please respond to the following:

How is the NPV rule related to the goal of maximizing shareholder wealth, and under what conditions would you expect the NPV and IRR rules to return the same accept / reject decision?

Identify one problem with using IRR as part of this decision-making process.

What value might the financial decision maker gain by adding the profitability index to the decision-making process?

**Please cite sources

Solutions

Expert Solution

How is the NPV rule related to the goal of maximizing shareholder wealth

As NPV is mainly a discounted method, thus it can be seen as closely related to the goal of wealth maximization of the shareholders as it mainly concentrates on increasing the firm’s value by handling the projects which can help in bringing the incremental cash flows in a certain organization. The situation of accepting a project with the help of NPV is that it should be having a positive value.

Under what conditions would you expect the NPV and IRR rules to return the same accept / reject decision

When the projects being evaluated are mutually inclusive.

Identify one problem with using IRR as part of this decision-making process.

When a project yields uneven cash flows, it becomes a problem to use IRR as a capital budgeting measure.?

What value might the financial decision maker gain by adding the profitability index to the decision-making process?

Profitability index enables a firm to evaluate whether the implemented project s adding or decreasing the project value.

Rahul Sunny answered 1 year ago

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