650 questions 3 and 4 Assignment Example | Topics and Well Written Essays - 500 words

650 questions 3 and 4 - engagement ExampleThis regularity is the best since it considers the time value of money, incorpo set ups all the future cash flows, and has clear criteria of how to purpose whether to invest in the project. (Drake & Fabozzi, 2002) Besides, the rate employ in discounting is the cost of capital which can be decided with certainty rather than being assumed.Drake & Fabozzi (2002) further underscores that in as much as the internal rate of return (IRR) is a good way of qualification an investment decision it is a bit complicated and sometimes results into conflicting results. IRR measures the expected rate of the investments that is made by an investor. In instances that the cash flows are two negative and positive, IRR has led to the determination of more than one rate of return thus making it knockout for an investor to make informed and profitable decisions. It should however be noted that in as much as the modified internal rate of return (MIRR) can b e used where IRR is improper, MIRR is more complex and cannot be easily understood by those without financial knowledge. NPV thus remains a simple method of making investment judgement that will certainly help maximize shareholders returns.To ensure that the limited resources are move in the most profitable investments, the need for capital budgeting cannot be overemphasized. The use of the various investment appraisal methods have been exploited to help make capital budgeting decisions. Most importantly, NPV approach has been lauded as the best method of helping make capital decisions. Nonetheless, NPV alone is not sufficient since other important decisions affecting projects favorableness cannot be easily delimitd by the use of this approach.Sensitivity analysis, scenario analysis, and Monte Carlo simulations have further been used to analyze the returns arising from investment portfolios. When using sensitivity analysis in making capital decisions, investors get to determine the extent to which a change in a specific cost