FINANCE

1. Capital budgeting is important because it creates accountability and measurability.

An example of a bad capital budgeting is the Chevrolet Volt which has been a total failure.

The role of capital budgeting in a company’s long term planning is;

Long term investment once made cannot be reversed without significance loss of invested capital.

Pros and cons of IRR

Pros - It is widely accepted in the financial community as a quantified measure of return and it's also based on discounted cash flows - so accounts for the time value of money.

Cons - There are three well known pitfalls of using IRR that are worth discussing:

1. Multiple or no Rates of Return

2. Changes in Discount Rates

3. IRRs Do Not Add Up

Payback Period PROS AND CONS

Pros - Allows for an easy understanding by management and stakeholders of when the initial investment will be recouped.

Cons - Does not take into account the time value of money. Discounted cash flow should be the preferred way to evaluate payback since it does recognize the time value of money..

PROS AND CONS OF NPV

Pros - Accounts for the fact that the value of a dollar today is more than the value of a dollar received a year from now - that's the time value of money concept.

Cons - Does not give visibility into how long a project will take to generate a positive NPV due to the calculations simplicity.

In my opinion, I would recommend using NPV because of two reasons;

1. Reinvestment of Cash Flows

2. Multiple Solutions for the IRR: It is possible for the IRR to have more than one solution.