Final answer:
Calculating IRR, NPV, and PI for an MBA investment considers discounting future cash flows and assessing the pros and cons of each method alongside capital budgeting risks. Pros include value representation for NPV, reinvestment considerations for MIRR, and relative profitability for PI, while cons involve limitations like the scale of investment and potential for multiple results.
Step-by-step explanation:
Calculating the Internal Rate of Return (IRR), Net Present Value (NPV), and Profitability Index (PI) involves discounting future cash flows back to their present value. Assuming an initial investment of $20,000 for an MBA that yields an additional $10,000 in annual take-home pay over 5 years, and a cost of capital at 15%, these values can be found using respective financial formulas. The NPV is the sum of the present values of future cash flows minus the initial investment. The IRR is the discount rate at which the NPV equals zero, and PI is the ratio of the present value of future cash flows over the initial investment.
The pros and cons of NPV, Modified Internal Rate of Return (MIRR), and PI as capital budgeting techniques include: NPV's ability to represent actual added value and ease of comparison, MIRR's addressing of reinvestment rate assumptions, and PI's benefit of indicating relative profitability. However, NPV cannot provide the scale of an investment, MIRR may yield multiple results complicating decision-making, and PI ignores the scale of the investment. Capital budgeting risk involves uncertainties that include economic conditions and project-specific factors. Methods to identify risks include scenario and sensitivity analysis, which look at various possible outcomes or how changes in a single variable affect the project.