Chapter 8 Finance 305 LS

In general, NPV is __________.

-Equal to zero when the discount rate equals the IRR -Negative for Discount Rates above the IRR -Positive for Discount Rates below the IRR

The basic NPV investment rule is:

-If the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference. -Accept a project if the NPV is greater than zero -Reject a project if its NPV is less than zero

One of the weaknesses of the payback period is that the cutoff cate is an ________ standard.

arbitrary

The Profitability Index is also called the ___________ ratio.

cost-benefit

The PI is calculated by dividing the PV of the __________ cash flows by the initial investment.

future

Present problems when using the IRR method?

non-conventional cash flows and mutually exclusive projects

What is a disadvantage of the Profitability Index?

Cannot rank mutually exclusive projects

Advantages of the payback period method for management?

The payback period method is ideal for minor projects, easy to use, and allows lower level managers to make small decisions effectively.

Higher cash flows earlier in a project's life are ________ valuable than higher cash flows later on.

more (present value is inversely related to time)

If a firm is evaluating two possible projects, both of which require the use of the same production facilities, and taking one project means that we cannot take the other, these projects would be considered ___.

mutually exclusive

The NPV is ________ if the required return is less than the IRR, and it is ________ if the required return is greater than the IRR.

positive, negative

T/F: Some projects, such as mines, have cash outflows followed by cash inflows and cash outflows again, giving the project multiple internal rates of return.

True (Whenever subsequent cash flows are both negative and positive, multiple internal rates of return may occur)

The PI rule for an independent project is to _______ the project is the PI is greater than 1.

accept

(T/F) A project with non-conventional cash flows will produce two or more IRRs.

True