Capital budgeting decisions that include both investment and financing decisions can be analyzed by:
I. Adjusting the present value II) Adjusting the discount rate
III. Ignoring financing mix
A) I only
B) II only
C) III only
D) I and II only

Question

Quizplus · Accepted Answer

To accurately analyze capital budgeting decisions that involve both investment and financing decisions, it is important to adjust both the present value and the discount rate. The present value should be adjusted based on the financing mix, such as the cost of debt or equity. The discount rate should also reflect the financing mix by adjusting for the cost of capital or the weighted average cost of capital. Therefore, options I and II are both necessary. Ignoring financing mix (option III) would result in an inaccurate analysis.

Capital Budgeting Decisions That Include Both Investment and Financing Decisions