Review Concept Questions 3, 13 and 14 on pages 225-226. Based upon the answer to these questions, describe which three of these investment criteria found in question 3 would you recommend for use at your current (or a former) company for the selection of investment projects. In at least 200 words, fully explain the rational for your selection.

3. Comparing Investment Criteria. Define each of the following investment rules and discuss any potential shortcomings of each. In your definition, state the criterion for accepting or rejecting independent projects under each rule.

a. Payback period

b. Average accounting return

c. Internal rate of return

d. Profitability index

e. Net present value

13. Net Present Value One potential criticism of the net present value technique is that there is an implicit assumption that this technique assumes the intermediate cash flows of the project are reinvested at the required return. In other words, if you calculate the future value of the intermediate cash flows to the end of the project at the required return, sum the future values, and find the net present value of the two cash flows, you will get the same net present value as the original calculation. If the reinvestment rate used to calculate the future value is lower than the required return, the net present value will decrease. How would you evaluate this criticism?

14. Internal Rate of Return One potential criticism of the internal rate of return technique is that there is an implicit assumption that this technique assumes the intermediate cash flows of the project are reinvested at the internal rate of return. In other words, if you calculate the future value of the intermediate cash flows to the end of the project at the required return, sum the future values, and calculate the internal rate of return of the two cash flows, you will get the same internal rate of return as the original calculation. If the reinvestment rate used to calculate the future value is different than the internal rate of return, the internal rate of return calculated for the two cash flows will be different. How would you evaluate this criticism?

has been added to your cart!

have been added to your cart!

You must log in and be a buyer of this download to submit a review.