8. Discussion (No outside sources required all necessary information has been presented in Module 4 in
Moodle)
a) Using what you have learned in the lecture notes and having just analyzed each of the projects using
the four key capital budgeting techniques, describe the reinvestment assumptions for each of the
methods. (2 pts) Hint, the reinvestment rate assumptions have to do with how (if) the cash flows are
discounted during analysis.
i. Payback Period
ii. Profitability Index (PI)
iii. NPV
iv. IRR
b) For an independent project, which of the (above listed) capital budgeting analysis techniques will
always have the same accept/reject decision, and why. Be precise in your explanation of "why" the
techniques would agree. Hints: Keep it simple, don't go down the "but what if....." road Independent
projects - accepting one doesn't mean you have to reject another one. Don't assume financial
constraints (you could theoretically fund all viable projects). Assume "normal" cash flows (only 1 sign
change, in other words, the outlay is considered negative and all future cash flows are positive), so
that there is only a single IRR. (2 pts)
c) How would an increase in the required rate of return affect the project's calculated NPV? ii) How
would the increase in the required rate of return impact the project's internal rate of return (IRR)?
Assume no change to the timing or amount of cash flows. Explain each and be specific as to Why (or
if there is an impact) and how would the higher required rate change the NPV and the IRR (2 answers
here) and what is the possible impact on the accept/reject decision for the project under each of the
two analysis methods (another 2 answers). (2 pts)
