Chapter 8 Financial Management (read and answer)

Select all that apply Which of the following are weaknesses of the payback method? Multiple select question. -Cash flows received after the payback period are ignored. -All cash flows are included in the payback period. -The cutoff date is arbitrary. -Time value of money principles is ignored.

-Cash flows received after the payback period are ignored. -The cutoff date is arbitrary. -Time value of money principles is ignore

True or false: The measure of average accounting profit is in the numerator of the average accounting return (AAR) formula. True False

True

Select all that apply What are the advantages of the payback period method for management? Multiple select question. -The payback period adjusts for the discount rate. -The payback period method is ideal for minor projects. -The payback period method is easy to use. -It allows lower-level managers to make small decisions effectively.

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

The payback period can lead to foolish decisions if it is used too literally because: Multiple choice question. -it uses an arbitrary discount rate. -it ignores the initial cost. -it always includes all the cash flows. -it ignores cash flows after the cutoff date.

-it ignores cash flows after the cutoff date.

True or false: When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus the discount rate raised to the nth power. True False

True

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 Blank______. Multiple choice question. -interdependent -co-dependent -independent -mutually exclusive

mutually exclusive

One of the weaknesses of the payback period is that the cutoff date is a(n) Blank______ standard. Multiple choice question. -arbitrary -industry -market -perfect

arbitrary

The Blank______ method evaluates a project by determining the time needed to recoup the initial investment. Multiple choice question. -accounting rate of return -internal rate of return -payback

payback

The IRR is the discount rate that makes NPV equal to Blank______. Multiple choice question. -$42 -zero -the terminal book value of the project's fixed assets -the payback period

zero

The multiple rates of return problem is the possibility that more than one discount rate may make the net present value of an investment equal to ?

zero

The spreadsheet function for calculating net present value is Blank______. Multiple choice question. =NPV(rate,CF1, ..., CFn) + CF0 =NPV(rate,CF0, ..., CFn) =MIRR(rate,CF0, ..., CFn) =PV(rate,CF0, ..., CFn)

=NPV(rate,CF1, ..., CFn) + CF0

The profitability index (PI) rule for an independent project is to Blank______ the project if the PI is greater than 1. Multiple choice question. reject delay accept

accept

Based on the average accounting return rule, a project is Blank______ if its average accounting return exceeds a target average accounting return. Multiple choice question. -rejected -blue-chip -acceptable -break-even

acceptable

A project should be Blank______ if its NPV is greater than zero. Multiple choice question. rejected delayed accepted

accepted

True or false: An advantage of the AAR is that it is based on book values, not market values. True False

False

True or false: The IRR is easy to use because you only need to know the appropriate discount rate. True False

False

True or false: The PI always results in correct decisions in comparisons of mutually exclusive investments. True False

False

True or false: The discounted cash flow (DCF) valuation estimates future value as the difference between the market price and the cost of the investment. True False

False

Select all that apply If a project has multiple internal rates of return, which of the following methods should be used? Multiple select question. -IRR -MIRR -NPV

MIRR NPV

______ is a measure of how much value is created or added by undertaking an investment. Multiple choice question. -An investment's market value -Net future value -An investment's social value -Net present value

Net present value

True or false: A disadvantage of the AAR is that it does not take into account the time value of money. True False

True

True or false: A project with nonconventional cash flows will produce two or more IRRs. True False

True

True or false: According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), the internal rate of return and the NPV are the two most popular capital budgeting methods used by firms in the United States and Canada. True False

True

The profitability index is calculated by dividing the PV of the Blank______ cash inflows by the initial investment. Multiple choice question. -future -previous -positive

future

A(n) Blank______ project does not rely on the acceptance or rejection of another project. Multiple choice question. -independent -dependent -co-dependent -mutually exclusive

independent

The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its Blank______. Multiple choice question. initial cost discount rate interest rate coupon rate

initial cost

Capital budgeting is probably the most important of the three key areas of concern to the financial manager because Blank______. Multiple choice question. -it's the most controversial -it defines the business of the firm -it's the most difficult -it's the least understood

it defines the business of the firm

The discounted cash flow valuation shows that higher cash flows earlier in a project's life are Blank______ valuable than higher cash flows later on. Multiple choice question. -less -more

more

If the IRR is greater than the Blank______, we should accept the project. Multiple choice question. -payback period -required return -tax rate -inflation rate

required return

Internal rate of return (IRR) must be compared to the Blank______ in order to determine the acceptability of a project. Multiple choice question. -required return -inflation rate -federal funds rate

required return

Select all that apply Which of the following are reasons why IRR continues to be used in practice? Multiple select question. -The IRR of a proposal can be calculated without knowing the appropriate discount rate. -Businesspeople prefer to talk about rates of return. -The IRR allows the correct ranking of projects. -It is easier to communicate information about a proposal with an IRR.

-The IRR of a proposal can be calculated without knowing the appropriate discount rate. -Businesspeople prefer to talk about rates of return. -It is easier to communicate information about a proposal with an IRR.

The profitability index is also called the Blank______ ratio. Multiple choice question. -cost-cashflow -benefit-cost -investment-benefit -cost-investment

-benefit-cost

The internal rate of return is a function of Blank______. Multiple choice question. -the market interest rate -the cost of debt incurred by a project -a project's cash flows -a project's opportunity costs

a project's cash flows

The present value of the future cash inflows are divided by the Blank______ to calculate the profitability index. Multiple choice question. -initial investment -internal rate of return -net present value -discount rate

initial investment

What is the primary concern of the payback period rule? Multiple choice question. -Whether the bank requires a higher interest rate than the market? -How long it takes to recover the initial investment -How long until the loan on your investment comes due? -Whether you deserve to get your money back?

-How long it takes to recover the initial investment

Which of the following is a disadvantage of the profitability index? Multiple choice question. -It cannot rank mutually exclusive projects. -It is closely related to NPV. -It is useful when capital is rationed. -It is easy to understand.

-It cannot rank mutually exclusive projects.

Select all that apply The combination MIRR method is used by the Excel MIRR function and uses which of the following? Multiple select question. -discounting ALL cash inflows to time 0 -compounding ALL cash flows to the end of the project -discounting all cash outflows to time 0 -a financing rate for discounting -a reinvestment rate for compounding -compounding cash inflows to the end of the project -a single discount rate for both discounting and compounding

-discounting all cash outflows to time 0 -a financing rate for discounting -a reinvestment rate for compounding -compounding cash inflows to the end of the project

One of the flaws of the payback period method is that cash flows after the cutoff date are Blank______. Multiple choice question. -not considered in the analysis -reserved for future projects -given greater value -given special consideration

-not considered in the analysis

The Blank______ is best suited for decisions on relatively small, minor projects, while Blank______ is more appropriate for large, complex projects. Multiple choice question. -payback period; NPV -IRR; NPV -payback period; URL

-payback period; NPV

Which of the following is a disadvantage of the payback period rule? Multiple choice question. -easy to understand -biased toward liquidity -requires an arbitrary cutoff point -adjusts for uncertainty of later cash flows

-requires an arbitrary cutoff point

According to the average accounting return rule, a project is acceptable if its average accounting return exceeds: Multiple choice question. -the required rate of return. -the net present value. -the internal rate of return. -a target average accounting return.

-a target average accounting return.

The average accounting return is defined as: Multiple choice question. -average net income/initial project cost. -average book value/initial project cost. -average net income/average book value. -average book value/average net income.

-average net income/average book value.

Select all that apply In general, NPV is Blank______. Multiple select question. -positive for discount rates above the IRR -positive for discount rates below the IRR -negative for discount rates above the IRR -equal to zero when the discount rate equals the IRR

-positive for discount rates below the IRR -negative for discount rates above the IRR -equal to zero when the discount rate equals the IRR

Select all that apply The basic NPV investment rule is: Multiple select question. -accept a project if the NPV is less than zero. -reject a project if its NPV is less than zero. -accept a project if the discount rate is above zero. -accept a project if the NPV is greater than zero. -if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference.

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

According to the basic IRR rule, we should: Multiple choice question. -reject a project if the IRR is less than the required return. -reject a project if the IRR is less than 10 percent. -reject a project if the IRR is greater than the required return. -accept the project if the IRR is less than the required return.

-reject a project if the IRR is less than the required return.

Which of the following are methods of calculating the MIRR of a project? Multiple select question. -the discounting approach -the present value approach -the reinvestment approach -the combination approach

-the discounting approach -the reinvestment approach -the combination approach

True or false: The payback period takes into consideration the time value of money. True False

False

True or false: The profitability index rule for an independent project states that, if a project has a positive NPV, then the present value of the future cash flows must be smaller than the initial investment. True False

False

True or false: There is only one way to calculate the modified IRR. True False

False

True or false: 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 False

True