Issues in Capital Budgeting and Marketing Efficiency Part 2
Using NPV will lead to the correct decision when evaluating projects with very different cash flow patterns over time. The firm can use the IRR on the incremental cash flows of the long-term project compared to the short-term project in order to achieve the correct decision, i.e., the same decision that NPV would recommend.
Discuss the following:
Marie LeBlanc has decided to move forward and acquire the drilling rigs to start a new line of service for her company. It is a very expensive undertaking. It is the first time she has personally borrowed $30 million and she is quite nervous that all works right. Recognizing she needs to make sure there is no stumbling along the pathway to success she assigns you, the CFO, to take the lead. Enlighten Ms. LeBlanc to your capital budgeting process.