Generally, all investments which have NPV>0, IRR>RRR PI>1 are acceptable. Special considerations come to action when the general acceptance criteria need adjustments I. Investment projects are independent of one another and therefore acceptance of one doesn’t affect acceptability of another. That is the investments are considered for different purposes and therefore, acceptance of one investment has no implication for the others. II. The firm has no restriction on the funds available for capital expenditure III. There is no risk associated with cash flows which have been injected into or are expected from the investment. IN THE REAL WORLD THESE ASSUMPTION MAY NOT HOLD BECAUSE: I. investment proposal can be dependent on one another such that acceptance of one would affect the acceptability of another. When this is the case then such investment are said to be mutually exclusive. II. In real world, funds are limited hence capital rationing has to be made. When you ration funds viable investments such that those with NPV>0, IRR>RRR and PI>1 may be left out. III. Investment decisions are normally undertaken under the conditions of risk. Assumptions such as increasing in economic growth are made before you invest. But these may change during implementation which will bring about variability in return (risk). Therefore one has to incorporate risk in capital budgeting decision. Two investments are said to be mutually exclusive if selecting one investment means that, the other must be excluded even if both of them are viable. Mutually exclusive investment cannot be accepted together. The issue is then, how to select the best investment. It is imperative that a system of ranking investments is designed so that only the best alternative is selected.
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