Why is capital budgeting such an important process? Why are capital budgeting errors so costly? Differentiate between NPV, PI, and IRR methods. What are the advantages and disadvantages of using each of these methods? Why is there a focus on cash flows rather than accounting profits in making capital-budgeting decisions? Why such an interest in incremental cash flows rather than total cash flows?
Capital is such an important process because it helps the company decide how to allocate its limited resources in such a way that it the company will receive the highest value from the deployment of its resources. This is the reason why capital budgeting errors are so costly. Once the company decides on which capital project to finance and once the capital assets for the project are purchased, and if that ...