Suppose a firm has evaluated four capital budgeting projects and, using one of the time value of money capital budgeting techniques, has determined that all of the projects are acceptable. If the projects are mutually exclusive, which of the following capital budgeting techniques should be used to make the purchasing decision to ensure the firm's value is maximized?

Question

Quizplus · Accepted Answer

The net present value (NPV) method should be used to make the purchasing decision. This is because NPV considers the time value of money and provides the total value of the project in dollar terms. It also allows comparison of the projects to determine which one will add the most value to the firm. In this case, since the projects are mutually exclusive, choosing the project with the highest positive NPV will maximize the firm's value. The other methods, such as traditional payback period (PB), internal rate of return (IRR), modified internal rate of return (MIRR), and discounted payback period (DPB), only consider certain aspects of the projects and may not necessarily result in the best purchasing decision.

Suppose a Firm Has Evaluated Four Capital Budgeting Projects And