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Capital budgeting and estimating cash flows

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1. What are the pros and cons of the decision rules for the NPV, the IRR, the MIRR, and the payback methods? Which is the most accurate method and why?

2. What are sunk costs? Should they be included in the cash flow estimation when making a capital budgeting decision? Why or why not?

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a) Net Present Value (NPV)
- It considers time value of money
- It accommodates different risk levels over the projects lifetime
- Can tell if the investment will increase the firms value
- It considers all cash flows

- It is difficult to compare projects that are not similar
- Requires the estimate of the cost of capital in order to compute net present value
- It is expressed in terms of the currency (dollars) and not in percentages

Internal Rate of Return (IRR)
- It considers the time value of money
- It allows comparisons of projects that are not similar
- Can tell if the investment will increase the firms value
- Considers all cash flows of the project

- Does not reflect varying risk levels over ...

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  • MBA, Aspen University
  • Bachelor of Science , Berea College
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