Assignment 2: Capital-Budgeting Criteria

The net present value (NPV) of a project is a measure of the difference between the project’s value and its cost. The internal rate of return (IRR) is another measure of the project’s attractiveness.  

These are by far the two most widely used measures for evaluating the value of capital investment projects.

NPV and IRR are the focus of this discussion assignment.   Your response should be one or two paragraphs in length for each of the following questions:

* What is the logic behind the NPV capital-budgeting framework?

* Would changes in the cost of capital ever cause a change in the IRR ranking of several projects?

* When it is clear that a project will be profitable, why should it be rejected if it has a negative net present value?

* Why should cash flow to be received at the end of six years be discounted more heavily than cash flow to be received at the end of five years?

By the due date assigned you are to submit your response to the Discussion Area. Use the same Discussion Area to comment on your classmates’ submissions and continue the discussion through the end of the module.

Comment on how your classmates would address differing views.

Grading Criteria

Maximum Points

Quality of initial posting, including fulfillment of assignment instructions 16

Quality of responses to classmates 12

Frequency of responses to classmates 4

Reference to supporting readings and other materials 4

Language and grammar 4

Total: 40