Chapter 7
When cash flows are conventional, NPV is _____ if the discount rate is above the IRR
negative
The incremental IRR is used to account for the problem of ________ when evaluating project cash flows
scale
The IRR allows a manager to summarize the information about a project with a ______ rate of return
single
A firm evaluating two mutually exclusive projects can
Accept one. Reject one of the projects Reject both projects
The discount rate is often referred to as
An opportunity cost
IRR must be compared to the _____ in order to determine the acceptability of a project.
Discount
Capital Rationing requires a company to
Limit their investments
The dollar difference in value between mutually exclusive projects can be found by calculating the _____ of the incremental cash flows
NPV
When cash flows are conventional, NPV is ______ if the discount rate is above the IRR
Negative
In general, NPV is _____
Negative for discount rates above the IRR. Equal to zero when the discount rate equals the IRR. Positive for discount rates below the IRR .
Capital _____ occurs when a firm doesn't have enough capital to fund all its positive NPV projects
Rationing
According to the basic IRR rule, we should ______ a project if the IRR is ______ than the discount rate
Reject; Less Accept; Greater
The discount rate assigned to a project reflects the
Risk of the project. Opportunity cost to the investor.
What does value additivity mean for a firm?
The value of a firm is simply the combined value of the firm's projects, divisions, and entities owned by the firm. The NPV values of individual projects can be added together
Why is a dollar received today worth more than a dollar received in the future?
Today's dollar can be invested, yielding a greater amount in the future.
True or False: Two challenges with the IRR approach when comparing two mutually exclusive projects are scale and cash flow timing.
True