Capital-Budgeting Criteria

The net present value (NPV) of a project is a measure of the difference between the project's value and its cost. The internal rate of return (IRR) is another measure of the project's attractiveness. These are by far the two most widely used measures for evaluating the value of capital investment projects.

NPV and IRR are the focus of this discussion assignment. Your response should be one or two paragraphs in length for each of the following questions:

• What is the logic behind the NPV capital-budgeting framework?

• Would changes in the cost of capital ever cause a change in the IRR ranking of several projects?

• When it is clear that a project will be profitable, why should it be rejected if it has a negative net present value?

• Why should cash flow to be received at the end of six years be discounted more heavily than cash flow to be received at the end of five years?