FIN 571 Week 4 DQs

FIN 571 Week 4 DQs

1.   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 non-diversifiable risk. The firm then undertakes all those projects that appear to have positive NPVs. Does this strategy really make sense?  Why or why not?

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2.. 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?

3     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?

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

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