CONTENTINTRODUCTIONCapital budgeting is one of the major activities of a business. Most businesses use capital budgeting for the decision-making process of selecting and evaluating long-term investments. The company needs to make the right decision regarding investment in fixed assets such as purchasing new equipment and delivery vehicles, constructing building expansions and many more. The decision must be the right one because the project involves enormous outflows of funds and is committed over many years. Most companies use capital budgeting as a tool to maximize future profits since they are only capable of handling a small number of large projects. projects at any time. Below are several methods used in capital budgeting, such as: • Accounting rate of return • Payback period • Net present value • Profitability index • Internal rate of return • Modified internal rate of return • Equivalent annuity • Valuation real options QUESTIONS a) Evidence from Many recent studies suggest that there are major differences between current theories of investment evaluation and the methods that companies actually use to evaluate long-term investments. i) Present theoretical arguments for choosing net present value as the best method for evaluating investments; ) Explain why, in practice, other methods of evaluating investment projects have proven more popular with decision makers than the net present value method. (Please compare at least three (3) methods) b) Describe the process a company can use to review and approve the capital expenditure budget. c) For decision-making purposes, projects can be divided into two groups: independent project and mutually...... middle of paper ......project whose selection of a project eliminates the possibility of select another project. In mutually exclusive projects, all projects must accomplish the same task. The company can therefore only select one project. The acceptance of the project depends on different factors such as the initial investment, the time required for its completion, the strategic importance of the project, etc. For example, there are three projects; Project A, Project B and Project C. The company selects Project C. Selecting Project C means that Projects A and B are automatically rejected. All projects to replace an existing project are mutually exclusive. Examples of mutually exclusive projects include projects that require or use the same type of capital investment, such as the consumption of a common raw material. Normally the project that adds the most value to the company will be selected..