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NPV-best method for making capital budgeting decisions

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Why is the net present value method the optimal capital budgeting method?

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Solution Summary

The solution discusses why NPV is the best method for making capital budgeting decisions. It also discusses the weaknesses of other methods like the Payback period.

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NPV is the difference between an investment's market value and its cost. Essentially, NPV measures how much value is created or added by undertaking an investment. Only investments with a positive NPV is further considered for investing.

The NPV rule leads to the maximization of shareholder wealth. This is because Net present value method discounts all future cash flows to the present. This method determines the value of cash inflows and outflows at a common time so ...

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