Capital budgeting projects that incorporate both investment and financing decision side effects can be properly analyzed by:
I.adjusting the project's present value (APV);
II.adjusting the project's discount rate (WACC);
III.relying only on MM Propositions I and II
A)I only
B)II only
C)III only
D)I and II only

Question

Quizplus · Accepted Answer

Incorporating both investment and financing decision side effects in capital budgeting projects requires adjustments to the project's present value and discount rate. Adjusting the present value involves calculating the adjusted present value (APV) by adding the present value of financing side effects to the project's present value. Adjusting the discount rate involves using the weighted average cost of capital (WACC) that reflects the financing side effects. Therefore, choices I and II are correct. Relying only on MM Propositions I and II is not sufficient to properly analyze these types of projects, so choice III is incorrect.

Capital Budgeting Projects That Incorporate Both Investment and Financing Decision