Q.

N 9: - The case stated that Project C would be feasible unless either Project A
or B was also accepted. What is the implication of this statement on the current
capital budgeting analysis? Do you think that the way Project C is handled
earlier in the case is valid? Why or why not?

 Project C cannot be feasible unless Projects A or B is accepted.

 Projects A and B are mutually exclusive projects which implies that only one
project can be chosen at a particular point of time
 Projected C is dependent
Handling of project C valid
 Project C is best according to the NPV analysis
 The mutually exclusive projects A and B can provide a suitable precondition for the
implementation of Project C.

 Based on the NPV analysis we came to know:

 Project with higher NPV is better
 In case of independent project, having Higher positive NPV project should be selected
 In case of mutually exclusive, project with highest NPV is selected.
 Profitability index of A&C and B&C ranked first and second respectively
 Project C handled in the case earlier is valid because project C cannot be chosen without
choosing either Projects A or B.
Q.N 10: - Do you think that the quantitative measures alone are important in
capital budgeting evaluation? What qualitative factors could also be important
in capital budgeting evaluation?

 No, the decision solely based on the quantitative measures may not be accurate.
 Before making a final decision about investing on a project, quite often a project is
selected if it has acceptable IRR, NPV or other quantitative factors.
 Various qualitative factors also are considered as they can have a major impact on the
business.
Qualitative factors could also be important in
capital budgeting evaluation:
 Company Culture
 Environmental Concerns
 Ethical Considerations
 Employee Morale
 Ancillary Benefits
 Strategic Factors
Lessons Learnt
 Debt financing is important for the company. Investments in more than one project can be
done at the same time. Projects which were not feasible with an all-equity capital structure
become viable.
 A positive NPV is the best criterion to select among the available projects for an all-equity
firm.
 Since equity holders have ultimate authority over investment decisions, we have to be
concerned about how adding debt to the capital structure affects equity holders' investment
incentives.
 Both quantitative and qualitative factors need to be considered.
Thank You