Chapter 5: Net Present Value and Other Investment Criteria

¡Supera tus tareas y exámenes ahora con Quizwiz!

How does the timing and the size of cash flows affect the payback method? Assume the project does pay back within the project's lifetime. a. The timing but not the size of the cash flows affects the payback period. b. Receiving every cash inflow sooner will increase the payback period, all else held constant. c. A delay in receiving the cash inflows will decrease the payback period. d. An increase in the size of the first cash inflow will decrease the payback period, all else held constant.

An increase in the size of the first cash inflow will decrease the payback period, all else held constant.

For "normal" cash flows (the outflows occur before the inflows), the NPV is ______ if the discount rate is less than the IRR, and it is ______ if the discount rate is greater than the IRR. a. negative; negative b. negative; positive c. positive; negative d. positive; positive

Positive; Negative

What does value additivity mean for a firm? a. A new project will always add value to a firm. b. The NPV values of individual projects can be added together. c. All projects with positive NPVs will add an equal amount of value to a firm.

The NPV values of individual projects can be added together.

True or false: Two challenges with the IRR approach when comparing two projects are scale and differing cash flow patterns over time. True False

True

The payback rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date. a. rejects b. accepts

accepts

The property of value ______ implies that the contribution of any project to a firm's value is simply the NPV of the project. a. duplicity b. exclusivity c. additivity d. multiplicity

additivity

Internal rate of return (IRR) must be compared to the ______ rate in order to determine the acceptability of a project. a. discount b. federal funds c. inflation

discount

One of the flaws of the payback period method is that cash flows after the cutoff date are ___. a. given special consideration b. reserved for future projects c. not considered in the analysis d. given greater value

not given consideration

The ______ method differs from NPV because it evaluates a project by determining the time needed to recoup the initial investment. a. accounting rate of return b. internal rate of return c. payback

payback

A project with a cash inflow of $200 followed by a cash outflow of (-$250) one year later will have an IRR of ___ percent. 30 20 25 -20

25 (250/200) - 1

Which of the following is true for a project with a negative initial cash flow followed by positive cash flows? a. Accept if IRR is less than the market rate of financing b. Reject if IRR is greater than market rate of financing. c. Accept if NPV is greater than zero.

Accept if NPV is greater than zero

Which of the following are weaknesses of the payback method? (Select all that apply) a. It gives equal weight to all cash flows before the cutoff date. b. All cash flows are included in the payback period. c. Cash flows received after the payback period are ignored.

It gives equal weight to all cash flows before the cutoff date. Cash flows received after the payback period are ignored.

If the IRR is greater than the opportunity cost of capital, we should ___. a. revise the cash flows b. reject the project c. accept the project

accept the project

According to the basic IRR rule, we should ____ a project if the IRR is ____ than the opportunity cost of capital. a. accept; less b. accept; greater c. reject; greater d. reject; less

accept; greater reject; less

A major problem that still exists with the discounted-payback-period method is the: a. market rate of return b. opportunity costs c. arbitrary cutoff date d. cost to implement

arbitrary cutoff date

Higher cash flows earlier in a project's life are ______ valuable than higher cash flows later on. a. less b. more

more

Higher cash flows earlier in a project's life are ______ valuable than higher cash flows later on. a. more b. less

more

In capital budgeting, the net ______ is the value of a project to the company. a. sales b. future value c. income d. present value

present value

Capital ______ occurs when a firm doesn't have enough capital to fund all its positive NPV projects. a. relief b. yielding c. rationing d. structure

rationing

According to the basic IRR rule, we should ____ a project if the IRR is ____ than the opportunity cost of capital. (select all that apply) a. reject; greater b. accept; less c. reject; less d. accept; greater

reject; less accept; greater

The payback rule ______ a project if it has a payback period that is greater than a particular cutoff date. a. rejects b. accepts

rejects

Three attributes of NPV are that it: (select all that apply) a. uses all the cash flows of the project. b. uses cash flow. c. discounts the cash flows properly. d. doesn't rely on the discount rate.

uses all the cash flows of the project. uses cash flow. discounts the cash flows properly.

The IRR is the discount rate that makes the NPV of a project equal to ______. a. the terminal book value of the project's fixed assets b. the project's initial cost c. the payback period d. zero

zero

A project with a cash inflow of $185 followed by a cash outflow of (-$250) one year later will have an IRR of ___ percent. a. -20 b. 20 c. 30 d. 35

35% IRR = (250/180)-1

Which of the following are weaknesses of the payback method? (select all that apply) a. All cash flows are included in the payback period. b. Cash flows received after the payback period are ignored. c. It gives equal weight to all cash flows before the cutoff date.

Cash flows received after the payback period are ignored. It gives equal weight to all cash flows before the cutoff date.

Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period? a. Discounted payback period b. payback rate of return c. Modified internal rate of return

Discounted payback period

A project with an initial cash outflow followed by a cash inflow has an NPV that is positively related to the discount rate. True False

False

True or false: A project with an initial cash outflow followed by a cash inflow has an NPV that is positively related to the discount rate. True False

False

True or false: Investing more money in a project is a guarantee of greater profits. True False

False

When an initial cash outflow is followed by cash inflows, NPV is ______ if the opportunity cost of capital is greater than the IRR. a. zero b. negative c. positive

Negative

For a project with a positive initial cash flow followed by negative cash flows, we should: a. accept if the IRR is greater than R b. accept if the IRR is equal to R c. accept if the IRR is less than R

accept if the IRR is less than R

For a project with a positive initial cash flow followed by negative cash flows, we should: a. accept if the IRR is greater than R b. accept if the IRR is less than R c. accept if the IRR is equal to R

accept if the IRR is less than R

NPV ______ cash flows properly. a. discounts b. compounds

discounts

True or false: The scale of a project is never a concern when using IRR. True False

false

Which type of rationing occurs when a firm can't raise more money from the capital markets? a. linear b. soft c. index d. hard

hard

The payback period can lead to _____________ because it ignores cash flows after the cutoff date. a. an arbitrary discount rate b. correct decisions c. incorrect decisions d. negative cash flows for every project

incorrect decisions

The most important alternative to NPV is the ______ method. a. payback period b. discounted payback period c. average accounting return d. internal rate of return

internal rate of return

Capital rationing requires a company to: a. limit their investments. b. accept all projects with positive NPVs. c. accept all projects with positive IRRs. d. accept all projects with profitability indexes greater than 1.

limit their investments.

A project with an initial cash outflow followed by a cash inflow and then a cash outflow ____. a. never occurs b. may have multiple rates of return c. should never be considered d. will have a single rate of return

may have multiple rates of return

When an initial cash outflow is followed by cash inflows, NPV is ______ if the opportunity cost of capital is greater than the IRR. a. negative b. positive c. zero

negative

In capital budgeting, the net present value is the value of a project's ______ to the company. a. expenses b. future value c. cash flows d. sales

cash flows

Two mutually exclusive projects can be evaluated by: a. comparing the IRR of the two projects b. comparing the NPVs of the two projects c. comparing the IRR to the accounting rate of return

comparing the NPVs of the two projects

The IRR is the _________ that makes the NPV of a project equal to zero. a. project's initial cost b. payback period c. terminal book value of the project's fixed assets d. discount rate

discount rate

What is the profitability index for a project with an initial investment of $30 and subsequent cash inflows of $80 in Year 1 and $20 in Year 2 if the discount rate is 12 percent? a. 1.91 b. 3.67 c. .52 d. .67

1.91 =(-30+(80/1.12)+(20/1.254))/30

______ cash flows earlier in a project's life are more valuable than higher cash flows later on. a. Higher b. Lower

Higher

The payback method differs from ______ because it evaluates a project by determining the time needed to recoup the initial investment. a. accounting rate of return b. NPV c. internal rate of return

NPV

You must know the discount rate to compute ____, while the discount rate is necessary to apply ___. a. IRR, NPV b. NPV, IRR c. either IRR or NPV; either IRR or NPV

NPV, IRR

Which of the following are true for a project with a negative initial cash flow followed by positive cash flows? (select all that apply) a. Accept if IRR is less than the market rate of financing b. Reject if IRR is less than market rate of financing. c. Accept if NPV is greater than zero.

Reject if IRR is less than market rate of financing. Accept if NPV is greater than zero.

True or false: A project with an initial cash outflow followed by a cash inflow has an NPV that is negatively related to the discount rate. True False

True

True or false: The scale of a project can be an issue with IRR when choosing between mutually exclusive projects. True False

True

The decision rule for a project for which the first cash flow is an inflow and subsequent cash flows are negative states that we should ____ the project when the IRR is ____ than the discount rate. (select all that apply) a. accept; greater b. reject; greater c. accept; less d. reject; less

reject; greater accept; less

The discount rate assigned to a project reflects the ____. (select all that apply) a. risk of the project b. opportunity cost to the investor c. current interest rate set by the Fed d. sunk cost incurred by the investor

risk of the project opportunity cost to the investor

What is the IRR for a project with an initial investment of $250 and subsequent cash inflows of $100 per year for 3 years? a. -13.67% b. 23.38% c. 9.70% d. 21.86%

9.70%


Conjuntos de estudio relacionados

Human Biology Exam #4 Review for Ch. 11, 12, 14

View Set

Honors NSL Government Quiz Review

View Set

Characteristics of Disability Midterm Exam

View Set

Perioperative Nursing Care Practice Test

View Set

NCLEX_Musculoskeletal Disorders 222Q no exp

View Set

International marketing Chapter 16

View Set

World History Catholic Reformation quiz

View Set

A&P Chapter 23 mastering questions

View Set

donner - to give - French command forms

View Set

Diabetes Type 2- Pearson questions

View Set