Using NPV will lead to the correct decision when evaluating projects with very different cash flow patterns over time. The firm can use the IRR on the incremental cash flows of the long-term project compared to the short-term project in order to achieve the correct decision, i.e., the same decision that NPV would recommend.
Discuss the following:
Marie LeBlanc has decided to move forward and acquire the drilling rigs to start a new line of service for her company. It is a very expensive undertaking. It is the first time she has personally borrowed $30 million and she is quite nervous that all works right. Recognizing she needs to make sure there is no stumbling along the pathway to success she assigns you, the CFO, to take the lead. Enlighten Ms. LeBlanc to your capital budgeting process.
Capital Budgeting basically means that the company enlists and evaluates multiple opportunities in which it can invest its excess funds, or even borrow more funds in order to invest in the proposal which gives the best returns.
Answer and Explanation: 1
The capital budgeting process undertaken would be as follows:
- Enlisting the various rigs that are available
- Estimating the initial cost of...
See full answer below.
Become a member and unlock all Study Answers
Start today. Try it nowCreate an account
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
fromChapter 5 / Lesson 20
Learn about what net present value is, how it is calculated both for a lump sum and for a stream of income over multiple years. View some examples on NPV.