Chapter 9 Finance

has a cash flow pattern with no more than one sign change, where a sign change involves the change from a negatively signed cash flow (outflow) to a positively signed cash flow (inflow), or vice versa.

A conventional or normal project

The process of analyzing projects and deciding which are acceptable investments and which actually should be purchased.

Capital Budgeting

Post-audits are generally a waste of time, because it is nearly impossible for actual results to match forecasted results.

False

which of the following conclusions about capital budgeting are valid?

For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR, and The NPV shows how much value the company is creating for its shareholders.

Which of the following should be included in the capital budgeting process? (1)

Include all relevant cash flows, Evaluate the riskiness of the projected cash flows.

The acceptance or rejection decision made for this type of project does not affect the acceptance or rejection of another proposed capital project.

Independent project

The reliability of this capital budgeting technique is diminished when applied to projects exhibiting unconventional cash flows.

Internal-rate-of-return

The discount rate at which the present value of a project's cash outflows is equal to the present value of the sum of its future cash inflows, assuming that cash flows are reinvested at the firm's required rate of return.

Modified internal rate of return

A graph that illustrates the relationship between a project's net present value (NPV) calculated at a range of hurdle rates.

NPV Profile

As a result, when evaluating mutually exclusive projects should use

NPV method bc usually better decision criterion

The decision rule for this capital budgeting method states a project should be considered acceptable if the difference between its discounted cash inflows and cost is positive.

Net Present Value (NPV)

This analytical technique is less reliable for identifying acceptable projects as it ignores the time value of money.

Payback Period

Which of the following should be included in the capital budgeting process? (2)

Perform a post-audit after the asset is in place or the project is finished.

This analysis is conducted following the implementation of an accepted capital project and is intended to improve a firm's forecasting process and to improve the firm's operations.

Post-audit Analysis

Which of the following phrases correctly describe mutually exclusive projects? (1)

Project choices that rule out competing project choices

A capital budgeting analysis that determines if a capital asset should be purchased to take the place of a worn out, damaged, or obsolete existing asset.

Replacement Decision

Also called a firm's hurdle rate, it is used as the discount rate in a firm's net present value (NPV) calculations or the basis of comparison for a project's internal rate of return (IRR).

Required rate of return

Which of the following statements indicates a disadvantage of using the regular, or conventional, payback period for capital budgeting decisions

The payback period does not take into account the cash flows produced over a project's entire life and The payback period does not take into account the time value of money effects of a project's cash flows.

Which of the following phrases correctly describe mutually exclusive projects? (2)

Those projects that, if accepted, preclude the acceptance of all other competing projects, and by definition they are also not independent projects

A post-audit involves comparing actual results with forecasted results.

True

Capital budgeting is the long-term planning for the purchase of assets whose cash flows extend beyond one year.

True

Effective capital budgeting improves the timing and quality of the assets purchased.

True

The IRR is the rate that forces the NPV to equal zero

hence, the calculated IRR is independent of a project's rate of return and will not change

The IRR calculation assumes that the rate at which cash flows can be reinvested is the

internal rate of return (IRR)

has a cash flow pattern with either more than one or no sign changes.

nonconventional or nonnormal project

The NPV calculation implicitly assumes that intermediate cash flows are reinvested at the

required rate of return

Which version of a project's payback period should the CFO use when evaluating Project Omega, given its theoretical superiority?

the discounted payback period bc it takes the expected cash flows' time value of money effects into account and the regular payback period does not.