5/26/2018 Article Review 1

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Stephanie Ng

Corporate Finance

Article Review 1

1. Large firms are more likely to use NPV method when making an investmentdecision because large firms have a higher debt ratio and are higher leveragedcompared to smaller firms.

2. 75.7% of CEOs use the IRR method. Some problems with the IRR method is thatthere can be multiple IRRS or no IRR and scale and slope can be conflicting. Yes,

these potential problems are relevant to CEOs of large corporations because

when managers maximize IRR, the company may end up rejecting positive NPV

projects.

3. Research and pharmaceutical firms might use the options method in order todecide on investment decisions. Since the options method involves strategic

planning, such firms can use the options method to evaluate risky projects such

as new drug development.4. Selection bias is the bias that occurs when certain groups of people are chosenfor a research project. For their surveys, the authors mostly used the responses

of CEOs and CFOs of the companies. In a way, the authors are neglecting

managers, individuals who are directly exposed to the daily financial operations

of a business. The data might be a little skewed towards executive decisions by

the most powerful person in a company: the CEO.

5. The authors wanted to show whether having an MBA affected the choices of theCEOs and CFOs. Since NPV and IRR are methods taught in MBA classes, it makes

sense that CEOs with MBAs would use NPV and IRR when making decisions.

Theyre just applying the material they learned in school to real life investment

decisions.

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