Business & Finance Homework Help | Business & Finance homework help
To determine the best capital budgeting project, you can use Weighted Average Capital Cost (WACC). This will allow you to compute paybacks and calculate net present values (NPV), Internal Rate of Return (IRR) or Modified Internal Rate of Return (MIRR) to compare two projects. WACC represents the expected return from investments made by a business, making it a useful benchmark for comparing different projects.
If two projects are repaid in 4 and 5 years, respectively, the project with the shorter payback period may have a higher appeal because it is less risky. If both NPVs are positive, but the higher one is valued then it could suggest that there will be greater profits over time.
Lastly, if both have IRRs above their WACCs then they may both provide sufficient returns on investment – however, some companies choose to use MIRRs which take into account timing differences between cash flows when making decisions about which project should be accepted. Ultimately though whichever option yields the highest profitability while still being within the company’s acceptable level of risk should ultimately be chosen as its primary choice for future investments.