Te basics of capital budgeting evaluating the cash flows1

Reference no: EM13381294

The Basics of Capital Budgeting: Evaluating the Cash Flows

1. In a capital budgeting context, explain how a positive NPV is evidence of an "abnormal" rate of return on a project.

2. Briefly explain the following statement: For the most part the market for financial securities is efficient while the market for capital budgeting ideas is not.

3. Explain the following statement: "When the NPV of a project = $0, the discount rate being used will equal the project's IRR." Use math to explain your answer. Hint: Equations 10-1 and 10-2 may help with the math.

4. Compare the reinvestment rate assumptions made by the NPV, IRR, and MIRR methods. Which method, NPV or IRR, makes a more reasonable reinvestment rate assumption? Explain why?

5. Do the NPV and IRR methods always agree with respect to capital budgeting accep reject decisions? Answer and explain. (Hint: See Figure 10-7)

6. In what sense is a project's IRR similar to the YTM on a bond?

Reference no: EM13381294

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