CAPITAL INVESTMENT DECISION and CAPITAL BUDGETING FOR INTERNATIONAL PROJECT INVESTMENT DECISION1
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Free sample — 8 of 66 rapid-fire Q&A cards.
What is the primary objective of capital investment decision-making in a firm?
The primary objective is to select investment proposals that maximize shareholder wealth by generating returns greater than the cost of capital over the project's life.
What is the difference between independent and contingent projects in capital budgeting?
Independent projects have no relation; contingent projects depend on other projects.
What does the Net Present Value (NPV) method measure in capital budgeting?
NPV measures the difference between the present value of future cash inflows and the initial investment outflow, discounted at the firm's required rate of return; a positive NPV indicates value creation.
What is the Net Present Value (NPV) rule for accepting or rejecting a single project?
Accept if NPV is positive; reject if NPV is negative.
How is the Internal Rate of Return (IRR) defined in capital budgeting?
IRR is the discount rate at which the NPV of a project equals zero; a project is accepted if its IRR exceeds the firm's cost of capital or hurdle rate.
What is the decision rule when NPV and IRR methods conflict for mutually exclusive projects?
Prefer NPV method as it measures absolute value creation.
What is the Profitability Index (PI) and how is it used in project selection?
PI is the ratio of the present value of future cash inflows to the initial investment; a PI greater than 1.0 indicates an acceptable project and is especially useful when capital is rationed.
What is the concept of 'crossover rate' in comparing two mutually exclusive projects?
Rate at which NPVs of two projects are equal to each other.
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