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from class: Managerial Accounting Definition Baseline criteria are the minimum standards or requirements that a capital investment project must meet to be considered viable. These criteria often include financial metrics such as return on investment (ROI), net present value (NPV), and internal rate of return (IRR).
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Predict what's on your test 5 Must Know Facts For Your Next Test Baseline criteria help in filtering out unworthy projects early in the decision-making process. Common baseline criteria include NPV greater than zero, IRR above the cost of capital, and a payback period within a specified timeframe. Meeting baseline criteria does not guarantee project approval; it merely qualifies the project for further evaluation. Baseline criteria can vary between organizations depending on their strategic goals and risk tolerance. Sensitivity analysis is often used in conjunction with baseline criteria to assess how changes in assumptions impact project viability. Review Questions What are three common financial metrics used as baseline criteria for capital investment decisions? How do baseline criteria aid in the capital budgeting decision-making process? Why is sensitivity analysis important when evaluating projects against baseline criteria?
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