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    Importance of Capital Budgeting for shareholder wealth

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    Why is capital budgeting important, specifically in terms of increasing shareholder wealth?
    - Describe an example where pursuing an investment that has not passed normal capital budgeting go/no go criteria, may hurt the firms value.
    - Explain the pros and cons of the simple payback method, the net present value method and IRR method and why you think, if you had to pick one, that the NPV method may be best.
    - Why an accurate determination of a firms cost of capital is important for both the IRR method and NPV methods?

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    Solution Preview

    Why is capital budgeting important, specifically in terms of increasing shareholder wealth?

    Capital budgeting is the practice of finding investments that will generate profits that exceed cost of capital. If the firm doesn't employ assets that earn more than the cost of capital, shareholder wealth will not increase as this is the primary way a firm grows its assets and therefore the net assets owned by the shareholders.

    - Describe an example where pursuing an investment that has not passed normal capital budgeting go/no go criteria, may hurt the firms value.

    Let's say you wanted to buy equipment costing $750,000 that would generate $30,000 in profits. This investment did not pass the normal capital budgeting ...

    Solution Summary

    Your tutorial is 348 words plus two references and gives an example of equipment purchases with a return below cost of capital.

    $2.19

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