Screening Decisions and Preference Decisions:
Learning Objectives:
- Define, explain and give examples of screening and
preference decisions.
Capital budgeting decisions
fall into two broad categories:
-
Screening decisions.
-
Preference decisions.
Screening Decisions - Definition and Explanation:
Screening decisions relate
to whether a proposed project meets some preset standard of acceptance. For
example, a firm may have a policy of accepting projects only if they promise
a retune of, say, 20% on the investment. The required rate of return is the
minimum rate of return a project must yield to be acceptable.
Preference Decisions - Definition and Explanation:
Preference decisions relate
to selecting from among several competing courses of action. To illustrate,
a firm may be considering several different machines to replace an existing
machine on the assembly line. The choice of which machine to purchase is a
preference decisions.
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