Chapter 9

All of the following are disadvantages of the Payback Period, except: A. The company must select a specified number of years to compare projects. B. The method ignores the time value of money. C. All projects are considered based upon cash flows alone. D. Cash flows that extend beyond the cutoff date are not considered. E. The method incorporates the time value of money.

E. The method incorporates the time value of money.

What are non-conventional cash flows?

A combination of cash outflows and inflows.

All of the following are useful for understanding Profitability Index, except: A. A profitability index less than 1 equals a negative NPV. B. A profitability index greater than 1 equals a positive NPV. C. The denominator for the profitability index is the cost of the project. D. The initial investment is excluded when calculating the present value of the future cash flows. E. The initial investment is included when calculating the present value of the future cash flows.

E. The initial investment is included when calculating the present value of the future cash flows.

What is the first step in the Net Present Value (NPV) process?

Estimate the future cash flows.

What's one of the biggest challenges for the Net Present Value method is:

Identifying the appropriate discount rate to use.

Mutually exclusive projects

The acceptance of one project precludes accepting the other.

The Payback Period Rule states that a company will accept a project if:

The calculated payback is less than a pre-specified number of years.

Independent projects

The cash flows of one project are unaffected by the acceptance of the other

The Internal Rate of Return (IRR) represents which of the following:

The discount rate that makes the net present value equal to zero.