2 we use the capital budgeting rules such as npv irr

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2. We use the capital budgeting rules such as NPV, IRR, PI and discounted payback period to evaluate the projects. NPV is an useful method to evaluate whether one project is worth being taken or not, but as we can see, it is not a perfect rule, so we still need some other rules to make our decision. Other methods are also useful, but we can not use them separately, we should combine these methods effectively, and at last, we prefer the project which has the highest NPV, highest IRR, highest PI and the shortest discounted payback period. 3. 3. It depends on the specific case. Sometimes, different criteria do not agree in their recommendations. For example, the NPV of Project 3(393.92) is bigger than Project 4(228.22), so we think Project 3 brings about more benefits to the investor. But the IRR of Project 3(11.33%) is lower than Project 4(12.33%). But sometimes different criteria also agree. For example, the PI of Project 1(0.96) is lower than Project 2(1.02) and the IRR of Project 1 is also lower than Project 2. Thus, the PI and IRR agree in their recommendations. 4. The ranking of projects changes when we change the discount rate. When the rate is 10%, the NPV of Project 7 is lower than Project 8 and both figures are positive. But the rate changes to 14%, the NPV of Project 8 becomes negative. The NPV of Project 7 decreases but is still positive. Thus, the ranking of the projects has been changed.
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Christopher Reinemann
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