CF #8 Term

Net present value involves discounting an investment's:

future cash flows.

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to

recoup its initial cost.

Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently?

Internal rate of return and net present value

Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional.

Internal rate of return that exceeds the required return

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?

Net present value

The net present value profile illustrates how the net present value of an investment is affected by which one of the following?

Discount rate

Which one of the following is the primary advantage of payback analysis?

Ease of use

Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?

Mutually exclusive

Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?

Net present value

Which one of the following indicates that a project is expected to create value for its owners?

Positive net present value

Which one of the following can be defined as a benefit-cost ratio?

Profitability index

You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?

Profitability index

Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative.

Profitability index less than 1.0

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?

The investment is mutually exclusive with another investment of a different size.

Which one of the following statements is correct?

The payback period ignores the time value of money.

Which one of the following statements is correct? Assume cash flows are conventional.

When the internal rate of return is greater than the required return, the net present value is positive.

The net present value:

decreases as the required rate of return increases.

The internal rate of return is the:

discount rate that results in a zero net present value for the project.