Capital Budgeting - Subjective Questions

1. How does the concept of "time value of money" impact the capital budgeting process, and why is it crucial to consider when evaluating investment projects?
2. Discuss the main differences between the Payback Period and the Net Present Value (NPV) methods of capital budgeting. Which method do you believe is more reliable for making investment decisions and why?
3. Imagine a scenario where two investment projects have the same Net Present Value (NPV). How would you decide between them, and what additional factors would you consider to make a well-informed choice?
4. Explain the concept of the Internal Rate of Return (IRR) and its significance in capital budgeting. Discuss the potential challenges or limitations associated with using IRR as a decision-making criterion.
5. Discuss the risk and uncertainty factors that can affect capital budgeting decisions. How might techniques like sensitivity analysis and scenario analysis help in addressing these uncertainties?
6. In the context of capital budgeting, what is the difference between independent projects and mutually exclusive projects? Provide examples of both and explain how the decision-making criteria might differ for each type.
7. How does the incorporation of taxation impact the evaluation of investment projects? Describe how factors like depreciation and tax shields play a role in determining a project's cash flows and its Net Present Value (NPV).
8. What role does the cost of capital (discount rate) play in the calculation of Net Present Value (NPV)? How can a company determine an appropriate discount rate for evaluating investment opportunities?
9. Explain the concept of "capital rationing" and discuss its implications for a company's capital budgeting decisions. How might a firm prioritize projects under capital rationing constraints?
10. Compare and contrast the Real Options Approach with traditional methods of capital budgeting, such as NPV and IRR. In what scenarios might the Real Options Approach provide more insights into investment decisions?