Potential Flaws with Regular Paycheck Method and the Capital Budgeting
Please read chapters 10 & 11 of Fundamentals of Financial Management, Concise Edition,10th Ed. (link provided)
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What are three potential flaws with the regular payback method? Does the discounted payback method correct all three flaws? Explain.
What is a mutually exclusive project? How should managers rank mutually exclusive projects?
Project X is very risky and has an NPV of $3 million. Project Y is very safe and has an NPV of $2.5 million. They are mutually exclusive, and project risk has been properly considered in the NPV analyses. Which project should be chosen? Explain.
Discuss the following statement: If a firm has only independent projects, a constant WACC, and projects with normal cash flows, the NPV and IRR methods will always lead to identical capital budgeting decisions. What does this imply about the choice between IRR and NPV? If each of the assumptions were changed (one by one), how would your answer change?
Your initial response should be a minimum of 200 words. Be sure to incorporate your weekly readings, citing your sources using proper APA (including in-text citations and references). The write a follow up response in support of your initial response as well as a follow up response in opposition of your initial response, Each follow up response should be a minimum of 125 words each.
Finance Visualization Discussion Post
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Finance Visualization Discussion Post
The regular payback method is characterized by three primary flaws, including (a) returns received in different timescales are allotted similar weight, (b) cashflows are not considered after the payback year irrespective of their magnitude, and (c) unlike the internal rate of return (IRR) which informs the company regarding how much a project would generate over the capital cost or net present value (NPV) which measures shareholder wealth derived from the project, the payback method informs the investor how when they would be recouping their investment. The discounted payback method corrects the first disadvantage and ignores the rest. It recognizes the time value of money by discounting the respective cashflows before computing the cumulative cash flow and establishes the time when the NPV is positive (Brigham & Houston, 2021).
In capital budgeting, mutually exclusive projects imply that choosing a single project based on a set of parameters automatically discredits the other. In other words, if one project is accepted, the others must be rejected. Investment managers should rank mutually exclusive projects according to their NPV. A project with a higher NPV is preferred over others because it would augment the firm’s earnings potential, resulting in shareholder wealth maximization (Brigham & Houston, 2021).
I would recommend choosing project X because it offers higher risk-adjusted NPV. $3 million risk-adjusted investment value is greater compared to $2.5 million risk-adjusted dollars. NPV is a feasible approach for mutually exclusive projects to establish the one to accept (Brigham & Houston, 2021).
The statement is authentic. Typically, a single project could offer a higher IRR, whereas the rival projec...