FIN 571 Week 4 DQs

Some firms use a single discount rate to compute the NPV of all its potential capital budgeting projects (Kruger, Landier, &Thesmar, 2011).  Even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all those projects that appear to have positive NPVs. Does this strategy really make sense?  Why or why not?

 

If the IRR of a project is exactly equal to its cost of capital should you approve the project?  What are some things to consider?  Why?

 

Why are capital budgeting projects are frequently classified into groups such as maintenance, cost savings/revenue-enhancement, capacity-expansion, new product/new business, and projects mandated by regulation or firm policy?

 

Is it really necessary to perform post audits, reviewing and measuring the performance of previous capital investments?  Why?  How soon should this be done?

 

Why is it important to recognize and exclude sunk costs from a capital budgeting analysis?  After all, isn’t a cost a cost?

 

Available Tutorials to this Question