Answered: capital projects

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 4Q

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Several proposed capital projects which are economically acceptable may have to be ranked due to constraints in financial resources. In ranking these projects, the least pertinent is this statement.

A. A ranking procedure on the basis of quantitative criteria may be established by specifying a minimum desired rate of return, which rate is used in calculating the net present value of each project.

B. In selecting the required rate of return, one may either calculate the organization’s cost of capital or use a rate generally acceptable in the industry.

C. If the internal rate of return method is used in the capital rationing problem, the higher the rate, the better the project.

D. If the net present value method is used, the profitability index is calculated to rank the projects. The lower the index, the better the project.

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