Question

According to the capital budgeting surveys cited in the text, in general, most financial managers of large Canadian firms:

A) Prefer to rely exclusively on payback analysis to evaluate projects.
B) Use the AAR as their primary method of evaluating capital budgeting projects.
C) Who use payback analysis use it only in conjunction with some other type of analysis.
D) Prefer to use NPV or IRR to analyze their investment projects.
E) Make use of payback analysis more heavily than discounted cash flow methods.

Answer 1

Most financial managers of large Canadian firms prefer to use NPV or IRR methods when evaluating capital budgeting projects, with payback analysis often being used in conjunction. This reflects the importance of considering the time value of money in investment decisions. The correct option is D.

Step-by-step explanation:

The question pertains to the methods financial managers of large Canadian firms prefer for evaluating capital budgeting projects. According to capital budgeting surveys cited in the text, in general, most financial managers of large Canadian firms prefer to use NPV (Net Present Value) or IRR (Internal Rate of Return) to analyze their investment projects.

This indicates a preference for analytical methods that take into account the time value of money, as opposed to methods like the payback period analysis or Accounting Rate of Return (AAR) that do not.

Firms invest in projects by spending money in the present to earn profits in the future and finance these investments through means such as early-stage investors, reinvesting profits, borrowing through banks or bonds, and selling stock.

The choice of financial capital sources also dictates how they are paid for, which is a crucial consideration in financial decision-making. Payback analysis may still be used by some managers, but usually in conjunction with other methods that provide a deeper financial analysis.